In the midst of a chaotic misalignment of targets and disagreement among OPEC’s oil producers on whether to continue a policy of supply adjustment in order to sustain a high oil price or pursue individual protectionist means to obtain market share, Iraq’s immediate oil decision making is lost in between with no clear national strategy.
The recent collapse of the Saudi-Russian oil alliance, and subsequently its role in maintaining higher oil prices, is a historical turning point that may well shape the future of fossil fuels in general and oil in particular. This future is increasingly affected by accelerated action and pledges undertaken by developed nations with the aim of reducing carbon-dioxide emissions and limiting their contribution to climate change. Today, we are in a situation where analyses project a peak oil demand, a literal reversal to the theory of peak supply, widely discussed in the last century.
In the current crisis, the competition between oil producers will center on market share preservation as demand for oil flattens or dips. During the high oil price period, new exploratory finds became commercially viable for high cost conventional oil, shale oil, tar sands or extra-heavy oil, like those found in Orinoco belt in Venezuela. With the favorable economic conditions, Canada, Venezuela and the United States revised up significantly their proven reserves. Overall, the world’s proven reserves have increased by 37% since 2000, instead of declining due to an increased daily production of almost 100 million barrels per day.
Oil producers stand at two groups; those with a high production cost and those with a large reserve and a lower cost of production. The former includes the United States, Russia, Canada in addition to OPEC’s Algeria. As competition in the market grows, the latter group, like Saudi Arabia, Iraq, and Kuwait are more capable of exerting expansionist power in an oversupplied market with dwindling demand.
It is not in the best interest of the latter group to keep oil prices high during such an environment that may benefit the first group of high cost producers. Both during the high oil price period ending 2014 and on the back of OPEC+’s supply restriction deal, shale oil producers were able of increasing the United States’ oil production from an initial 5.4 million barrels per day (mbpd) in 2010 to 12.8 mbpd in 2019. Last year, shale oil made 63% of total oil production. In other words, OPEC and Russia have lost almost 7 mbpd in market share over 9 years.
Adhering to the OPEC-and-Non OPEC production adjustment agreement, Iraq has lost a historical opportunity to raise its own production capacity to 10 mbpd. This was exacerbated by a lack of a well outlined national strategy, energy sector mismanagement, and the rentiership of state by increasingly depending on oil revenues for public payroll and current expenditures. Further, Iraq could have doubled its current proven reserves by channeling capital to additional oil and gas exploration activities. Practically, Iraq’s oil production breakeven price is more or less equal to those of Saudi Arabia and Kuwait.
Iraq’s forfeiture was involvement in the OPEC+ deal in the first place. By surrendering its policy of increasing oil production, Iraq became subject to the policies of other nations, like Saudi Arabia and Russia. While Iraq could have sustained short term losses from a lower oil price then, increasing production from 5 to more than 10 mbpd could have generated far greater revenues on the mid-to-long terms. Not to mention, becoming a competitive swing producer to Saudi Arabia by developing a low-cost spare capacity. The real catastrophe is that a decline in demand, leading to a future end to the era of oil, would keep three quarters of Iraq’s reserves in the ground unmonetized.
Global oil demand distribution by sector is at 57.5% for transport, 26.6% for industry (including 13% for petrochemicals) and approximately 15.9% for various applications. Increasingly, policies are drawn by developed nations for reducing the number of vehicles utilizing internal combustion engines. In 2016, the European Commission published a unified low-emission mobility strategy that sets a target of 15-17% of transport energy demand being fulfilled by low-carbon fuels by 2030. France pledged to end the sale of new fossil fueled cars by 2040 while Denmark and the United Kingdom are working to reach the target earlier at 2030 and 2035 respectively by banning the sale of new internal combustion vehicles. Also, environmental awareness is driving consumers to limit their usage of plastic based products.
In such an environment, it is in the best interest of Iraq to jump early right into the competition and build up oil production rapidly. This will deaccelerate and drive American, Canadian and high cost Russian crudes out of the market. Such a deacceleration will happen sooner or later in a decade or two but by then, if left to its current trajectory, these crudes would be supported by protectionist policies, mercantile trade agreements, and become integrated into a wide chain of refining and distribution infrastructure.
Iraq’s oil market policy has to be bold and forward looking. Crises have always been a source of opportunity. The current oil market situation is a chance for Iraq to break its own path, away from traditional constraints to serve long awaited rebuilding campaign post decades of wars, conflicts and sanctions. This will create a business focused model for integrating its increased oil production into Chinese, Indian and Southeast Asian markets.
Adnan Al-Janabi is Iraq Energy Institute (IEI)’s Board Vice Chairman. He’s the former head of the Energy Committee at Iraq’s Council of Representatives (2010-2014) and a Minister of State (2004).
