What does Iraq's crisis mean for oil?

Allegedly seized Iraqi army checkpoint in the northern Iraqi province of Salahuddin Militants have reportedly seized towns and military checkpoints in the north of Iraq.

Related Stories

Islamist militant gains in Iraq, and a threatened move on Baghdad, have created a sense of fear in oil markets.

The UN said hundreds have been killed as the Sunni-led Islamists advanced into Diyala province in the east - near Iran and close to the capital - having seized Mosul and Tikrit to the north.

Militants have also invaded Iraq's biggest oil refinery at Baiji after a siege lasting a week.

Led by the Islamic State in Iraq and the Levant (ISIS), the insurgents have threatened to push to regions further south dominated by Iraq's Shia Muslim majority, whom they regard as "infidels".

We take a look at why this is leading to higher oil prices.

line break
Where is the fighting?

Much of the fighting and seized territories are in the north of the country, while about 70% of the production is in the south, says David Horgan, chief executive of Petrel Resources, an oil company that's been in Iraq since 1999.

"In a way this isn't a new problem," as areas of Iraq such as Falluja, which was seized by ISIS at the end of last year, have often been subject to unrest and rebellion, he says. "But what's happened here is a major escalation. ISIS has managed to turn back the army."

"It's bad news but it doesn't affect production immediately," he says. But events such as this make oil production difficult.

Iraq produces around 3.3m barrels of oil each day.

Production didn't recover after the second Gulf war, and attracting the money needed for wells and exploration is hard.

"It's difficult to get people and capital committed to Iraq."

line break
Where is Iraq's oil?

The attack on the oil refinery at Baiji, which shut down production on Tuesday, has reportedly left insurgents in control three quarters of the site.

However, many of Iraq's productive oil fields are in the south, away from the conflict.

The northern region outside the Kurdish zone isn't producing much oil, says Paul Stevens, a professor and fellow at Chatham House.

It probably has the world's second-largest conventional oil reserves, he estimates. But lower post-war production means it's a less important market than it was.

In terms of foreign investment, companies lost interest in Iraq's government, which they see as difficult and unco-operative compared with other markets.

"Production has been struggling because there are problems of maintenance and infrastructure," he adds.

line break
Why is this affecting the price?

The price of Brent crude has made a series of sharp gains since the beginning of April, when the price was around $105 per barrel, now standing at about $113.50 per barrel.

"In the oil market there's a general sense that trouble in the Middle East means a higher oil price." says Prof Stevens, so the market may not be acting proportionately.

"The oil price shouldn't be affected that much unless there's a major collapse in Baghdad." Fear and uncertainty are playing a part in the price, he said.

A deal between Washington and Tehran on nuclear sanctions would help, says Prof Stevens, as it would add a lot more supply if oil embargoes were lifted from Iran.

"Oil price is a funny thing," says Mr Horgan. Each barrel of oil may be traded many times before it's used - "it's a speculative market driven by expectations."

line break
What about the future?

Iraq was created by western powers from the remains of the Ottoman Empire after World War One.

"If it collapses and fragments, the rest of the Middle East is also artificial", so there could be a knock-on effect, Prof Stevens said. The various rump states could find allies - the Kurdish north with Kurds in Syria and the Shia-dominated south with Iran - and that could lead to further conflict. That would only slow production, he says.

We are still very dependent on Middle Eastern oil, says Mr Horgan. There are today only about 80 days of reserves worldwide, down from a peak of more than 100 days.

While new oil sources like shale oil are being developed, more is needed to keep up with demand. "The big reserves are in the Middle East, Siberia and Venezuela, and those countries are largely closed to international exploration."

More on This Story

Related Stories

More Business stories


Business Live

    09:26: Greece

    Greece has paid the first €310m (£223m) instalment of an International Monetary Fund (IMF) loan that falls due this month. The government must pay a total of €1.5bn to the IMF this month over two weeks starting today. Prime minister Alexis Tsipras is reported to have asked for a meeting with European Commission chief Jean-Claude Juncker about the payments.

    09:09: Eurozone bonds

    Government bond yields in Portugal, Italy and Spain fell to new record lows on Friday, a day after the ECB gave details of its bond-buying plans. Portuguese 10-year yields fell 12 basis points to 1.7%, while Italian and Spanish equivalents fell 5 points to 1.28% and 1.19% respectively. The ECB starts buying government bonds on Monday in a bid to boost growth in the eurozone.

    Thomas Cook Via Twitter

    Dominic Walsh of The Times tweets: Question is whether, as with Club Med, Fosun has longer-term aim to use minority stake in Thomas Cook as basis for eventual full bid @walshdominic

    08:47: Market update

    The FTSE 100 Index is 8 points lower at 6,953. Shares in Weir Group are the biggest riser this morning on speculation that the engineering firm may be a bid target following a recent slump in its share price.

    08:31: Thomas Cook
    Thomas Cook

    Fosun, a Chinese investment firm, has bought a 5% stake in Thomas Cook for £91.9m and plans to increase its holding further. The move follows its purchase of French resort operator Club Med last month. Shares in Thomas Cook have soared 16% higher to 140p.

    08:17: RBS shares

    Just worth point out that RBS shares are trading at 376.9p and the government needs to sell its stake at an average of 455p per share just to break even on the money it pumped into the bank in 2008 and 2009. Also worth mentioning: Mr Osborne may not be Chancellor after May.

    08:03: RBS shares

    George Osborne has told the Financial Times he made a mistake in not radically restructuring taxpayer-owned Royal Bank of Scotland soon after he came to office in 2010. But the chancellor says he would like to proceed "as quickly as we can to get rid of it" after the general election.

    07:50: AGA profits

    AGA says operating profit stood at £9.6m, but it booked £4.1m in pensions charges, £3.3m in fair value costs relating to its stake in Fired Earth - its tiles business - leaving it with £2.2m. But that's before £1.5m in net interest charges on its pensions deficit, which doubled in the year from £35m to £72m. That brought pre-tax profits down to just £700,000, and left AGA in no position to pay a dividend. But the company does expect market conditions to improve this year.

    07:39: Vodafone
    The Hoff

    Vodafone has announced a plan to introduce a mandatory minimum maternity policy in all 30 countries in which it operates. By the end of 2015, all female employees will be offered at least 16 weeks fully paid maternity leave, as well as full pay for a 30-hour week for the first six months after they return to work. David Hasselhoff, however, will not be eligible.

    07:27: AGA profits
    AGA Rangemaster

    AGA Rangemaster has reported a slight fall in an annual pre-tax profit to £700,000, compared with £1.1m a year earlier. It has also announced it will not be paying a dividend to shareholders.

    DFS shares Via Twitter

    Retail analyst Nick Bubb tweets: The Chairman of DFS trumpets that it stands for "Dedication, Family and Success". Or Dull Furniture Sale? ;-) @NickBubb1

    07:15: DFS shares

    Buy one, get one half price! Furniture retailer DFS has priced shares at 255p - at the lower end of expectations. The stock starts trading at 0800 today and means the company will be valued at close to £550m.

    07:02: Eurozone outlook BBC Radio 4

    One thing that may help the eurozone economy is a small but significant accomplishment by the ECB that appears to have gone largely unnoticed. That was last Autumn's asset quality review of the banks, by the ECB which "gave pretty much everybody a clean bill of help", says Mr Cameron Watt. "And that's allowing banks to sell assets off their balance sheets."

    Greek economy Via Twitter Adam Parsons Business Correspondent

    Former Greek shipping minister @MVarvitsiotis tells #WUTM "we'll do whatever it takes...to stay in Eurozone...leaving would be a disaster" @AdamParsons1

    06:47: Eurozone outlook BBC Radio 4

    Mr Cameron Watt tells Today: "There is a following wind which is the lower oil price and the material decline in the currency [euro] against the dollar". He says those factors should help boost the eurozone economy, although he he sceptical that it will do as well as ECB president Mario Draghi (pictured) suggested at his press conference on Thursday.

    06:35: ECB bond buying BBC Radio 4
    The EURO logo is pictured in front of the former headquarter of the European Central Bank

    We're talking quantitative easing (QE) on the Today programme and why it pushes up stock markets. And Ewan Cameron Watt, global chief investment strategist at BlackRock, explains in the most clear terms. It is all about portfolio substitution, of course. "If I buy a whole lot of bonds and give you cash, you have now have to invest that cash," he says. "You don't want to buy bonds because of [current] negative yields, so it forces you to buy riskier assets, which inflates the prices of things like equities." Simples.

    06:25: Alpacas! Radio 5 live

    Let's face it - alpacas are a bit weird. But farming the cuddly critters appears to appeal to some who want to escape the rat race, alpaca farmer Mary-Jo Smith tells Wake Up to Money. She says alpaca wool is strong, luxurious and "just amazing to wear". The British Alpaca Society holds its annual show in Telford this weekend.

    06:15: Insurers v banks Radio 5 live

    Aviva shares ended 7% higher yesterday and Ewen Cameron Watt, chief investment strategist at BlackRock, tells Wake Up to Money it is no surprise that insurers are doing better than banks. He says operating conditions for banks are getting tougher, but some insurers are opting to join forces.

    06:05: Rangers FC
    A general view of the Ibrox Stadium, in Glasgow,

    It's a big day for Rangers FC as the club holds an emergency meeting where Dave King hopes to oust the board. However, there are question marks over King - who wants to become chairman - because of his convictions in South Africa for tax offences.

    06:03: Matthew West Business Reporter

    Happy Friday everyone. Don't forget you can get in touch by email at bizlivepage@bbc.co.uk or via twitter @bbcbusiness.

    06:00: It's Friday Chris Johnston Business Reporter

    Good morning and welcome to the last day of the working week. US unemployment figures are set to dominate the day and are out at 13:30. We'll bring you the reaction to those numbers and all the day's other business news as well.



  • Replica of a cargo boxSpecial delivery

    The man who posted himself to the other side of the world

  • Cartoon of women chatting on the metroChat wagon

    The interesting things you hear in a women-only carriage

  • Target practice for Lithuanian troopsBaltic shiver

    Europe editor Katya Adler on the alarm at Russian muscle-flexing

  • Ruben ReuterRuben returns Watch

    Child TV star with Down's syndrome on life away from home

Try our new site and tell us what you think. Learn more
Take me there

Copyright © 2015 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.