The Battle Over Iraq’s Oil, Ctd

David Unger checks up on the battle over the Baiji oil refinery, Iraq’s largest:

An Iraqi government spokesman told Reuters midday Thursday that the refinery was in their “complete control,” but other reports cite witnesses and refinery employees as saying Sunni rebels remain in command. The jihadists, led by the Islamic State of Iraq and the Levant (ISIS), likely aim long term to use revenue from fuel sales to finance terror operations across the region.

The Baiji refinery supplies motor fuel for northern Iraq and can process around 310,000 barrels a day, fed by oil fields in the autonomous Kurdistan region. It also fuels a nearby power plant that provides electricity for Baghdad, which already suffers from outages. … The flow of oil to the refinery is already off-line, according to Thamir Uqaili, an oil and gas consultant who worked in Iraq for the Iraq National Oil Co. and Iraq’s Ministry of Oil for over 40 years. If it remains damaged or off-line, it will create a shortage of products that cannot be replaced quickly, Mr. Uqaili writes via e-mail.

Frank Verrastro and Sarah Ladislaw look at what the Iraq crisis, in combination with other world events, means for world oil markets:

At present, the combination of the loss of Libyan, Nigerian, Venezuelan and Iranian oil production for various reasons, the uncertainty surrounding Russia’s gambit in Ukraine and the prospects for further reductions (seasonal maintenance, hurricanes, etc.) as we enter the second half of the year point to potentially tighter markets and higher prices (EIA’s Short term energy outlook for  June identified some 2.6 mmb/d of unplanned supply disruptions from OPEC sources and an additional 720 mmb/d of non-OPEC volumes).

Further, since Iraq was expected to contribute a large portion of near term incremental OPEC increases, sustained or enhanced violence would undoubtedly limit investment and volumes going forward.   And while Saudi Arabia still maintains over a million barrels per day of spare capacity and could offset some of the loss of larger Iraqi volumes, a complete loss of Iraqi exports would require more drastic measures – like the release of strategic stocks – in order to prevent prices from spiking.

From Steve LeVine’s viewpoint, it means a return to Saudi oil:

Until a couple of years ago, some Saudis spoke of adding yet another 2.5 million barrels a day of capacity, giving them 15 million in all. But if there ever were such plans officially, they have been shelved since the recent US shale revolution added millions of barrels a day to US production. In April, the US produced 11.2 million barrels (paywall) of oil and gas liquids a day, the most since 1970. It has been said that, four decades after the Arab oil embargoes, the US will soon become an oil exporter and no longer beholden to the Persian Gulf, and specifically Riyadh.

But a series of geopolitical disruptions including in Libya and Nigeria have canceled out those gains. And after the upheaval in Iraq analysts now believe that such disruptions will remain a factor for many years. If that is the case, Saudi Arabia’s oil will again be central to the global economy. Specifically, the world may need Riyadh to invest the billions necessary to increase its production capacity to 15 million barrels a day.

James West notes that the US is much less dependent on Iraqi oil than it was a decade ago:

But the U.S. is still tied to global oil markets, and that means what happens in Iraq can have an economic impact here. One thing every expert I spoke to agreed on is this: Even with decreasing oil imports, the U.S. is inextricably linked to world markets. That means that if the situation in Iraq continues to deteriorate, the U.S. economy may not be immune.

“The cost to the United States of a big oil shock … will be lower than they were [in the past],” [John] Duffield said. “Our main vulnerability is not so much the direct impact on oil, but the impact on the rest of the world’s economy, if there’s a big oil supply disruption.” He added that “as long as the world oil market is pretty highly integrated, the U.S. is vulnerable to an oil supply disruption in the Middle East or the Persian Gulf, regardless of the amount of oil it imports from the region.”