Iraqi Violence Means Higher Oil Prices

Oil pump

Iraq Violence Means Higher Oil Prices

By Thursday Review staff
| published June 20, 2014 |

Even though President Barack Obama has stressed to Americans and those watching worldwide that he does not intend to send U.S. troops back into ground operations in Iraq, the fear of military action and the possibility of disrupted oil supplies has triggered a sharp increase in oil prices this week.

And even though Ukrainian stockpiles of oil and gas are substantial enough to last through December of this year, Russian President Vladimir Putin’s decision to halt future gas and oil deliveries to Ukraine (and through the Ukraine) have already edgy European markets getting even more jittery as tensions rise along the Russian-Ukrainian border, and as violence continues to escalate east of the Dnieper River.

June is traditionally the time of year when oil prices ease and prices at gasoline pumps in the United States decline, or, at least level off.

But this week, as radical militants battled with Iraqi troops and security forces for control of one of Iraq’s largest oil refineries, there was widespread concern in markets around the globe that oil supplies could be seriously disrupted by the increasing violence in the Middle East. On Wednesday and Thursday, fierce fighting was reported at the Baiji refinery and oil distribution site, one of the largest of its kind in the Middle East and the biggest refinery in Iraq. Video footage captured from positions miles around the massive facility show enormous plumes of black smoke rising into the air, visible even from satellite imagery. Eyewitness reports say that the fighting is close action, building-by-building.

If the refinery and distribution site were to fall into the hands of the militants, it would not only present immediate problems for the Iraqi government, but could also have a huge effect on oil prices this summer. Iraqi President Nouri al Maliki has asked the United States for air strikes, but U.S. military officials are unclear if such strikes would have any effect, or even if the strikes would hit intended targets.

Over the previous ten days, ISIS forces have swept across northern Iraq from strongholds in Syria. The ISIS fighters have managed to take one city after another in rapid succession, with the Iraqi army collapsing in retreat. Iraqi equipment was abandoned, weapons were left behind, and in some cases Iraqi soldiers removed their uniforms and dropped them on the ground. The militants moved with lightning speed, leaving the Iraqi government in Baghdad stunned and risking the fragile balance struck when U.S. forces pulled out after nearly a decade of military intervention.

Despite a substantial counter-attack by Iraqi forces in the area near the refinery, civilian employees were apparently evacuated on Thursday, leaving only Iraqi security forces inside the parts of the facility. Other oil well sites and oil facilities have been attacked as well, but the refinery at Baiji is considered critical both for its size and output, but it serves primarily domestic markets. Militants, however, have vowed to push onward—violently if necessary—further south in Iraq toward the massive oil fields and refineries which produce oil for export. And oil experts are concerned that the shutdown of the Beiji facility could have a ripple effect throughout Iraq, disrupting transportation and distribution. Military tensions and violence will also cause evacuations of critical oil workers, many of them foreign nationals. The Malaysian energy giant Petronas, for example, has already ordered the evacuation of 28 employees, and may soon ask its remaining 138 to leave Iraq at once.

Iraq is one of the world’s largest oil producing nations. Market analysts say that by mid-summer oil could reach $120 per barrel. Currently, U.S. oil prices have reached their highest price since last year, and analysts say that prices may surge further over the next few weeks.

President Obama has repeatedly said he will not be sending troops into combat in Iraq, but this week he did authorize send in about 300 U.S. Special Forces personnel to act in an advisory role to the Iraqi army and Iraqi security forces.

With Shiite Muslims rallying in southern Iraq—some with the backing of neighboring Iran, which is predominantly Shiite—and with the Sunni majority in the north aligning itself (or acquiescing in) with the Islamic militants of ISIS, there are widespread fears that Iraq may be descending into civil war, or facing sectarian fragmentation.

Related Thursday Review articles:

Iraq’s Collapse & The Consequences for Saudi Arabia; Thursday Review; June 16, 2014.

Oil and Gas Prices: One Crisis at a Time; Thursday Review staff; June 17, 2014.