Iraqi Oil, Outside Interests


Picture the world as a giant game of Monopoly: the United States sits comfortably on Boardwalk while poor Haiti gets nothing more than Mediterranean Avenue and its lousy $2 rent; the EU decided to amalgamate the green properties with the yellow properties but today is thinking of kicking the yellows out.  Not all the spaces in the world have been snapped up, furthermore, though not for lack of trying on the efforts of a multitude of powerful nations.  One such "space" is Iraq, which remains in the throes of sectarian violence since the US disengagement, decidedly incapable of consistently profiting from its ample oil reserves.  If China represents the Park Place to our Boardwalk in this game, they've made a power move by landing on one of the utilities spaces and trying to snap it up.  The Chinese invested half a billion dollars into the Iraqi West Qurna oil fields in the opening weeks of May, suggesting that they're the biggest fish looking to snap up Iraqi oil fields that are increasingly for sale to the highest bidder.

A Commodity And An Aftermath

Trace the price of oil over the course of the last decade and overlay it with the number of US troops engaged in Iraq and you'll find a fairly steady relationship.  While oil dropped significantly in the aftermath of 9/11, the Bush Administration's (regretful) decision to oust Saddam Hussein from power in 2003 saw oil climb consistently up until the 2008 recession, quintupling in value from around $30 per barrel to its peak value of $145 per barrel.  While the recession did much more to affect oil prices than did the state of Iraq, the United States secured oil fields in the nation quickly in order to maintain the lifeblood of a fragile economy.  As petroleum accounts for 92% of Iraq's exports, a greater percentage than any other OPEC nation, re-building Iraq in the aftermath of Hussein required the oil fields to continue production in the face of everything from jihadists to crippling power shortages to a poor labor market.  Iraq exported twice as much oil in 2010 as they did in 2003, indicating stability in the face of post-recession market crashes as well as the new threat of radical Islam in the form of ISIS.  Iraqi stability is neither uniform nor total, however, when their list of international allies has but a handful of names and as turmoil from neighboring nations spills over into their border.  That makes Iraqi oil both a well-desired asset and a rather unstable asset.

Foreign Demand For Local Oil

The slowdown in the Chinese economy, having lost steam from 10% GDP growth to a mere 7.4% growth in the past year, has been widely analyzed throughout the economic world.  Where the prognostications of doom and gloom lose touch lies in the raw numbers of a "slowdown": BP believes that China will consume about half a percent less oil each year for the next twenty years, which means the slowdown remains hypothetical while peak consumption still lies ahead.  The bigger picture is simple: China still requires ten million barrels of crude oil per day, about half the figure of US consumption.  Ten million barrels doesn't magically spring into the nation's refineries, especially not when China produces less than half that figure from domestic wells.  For their oil needs, China has looked everywhere from Iraq to rival Russia to even Antarctica, building five geologic research stations on the frozen continent in order to asses the viability of energy production despite being a signatory to the pact that forbids exploitation of Antarctic resources.  The $526 million deal for the West Qurna oil fields represents a fantastic trump card for Chinese energy interests, where they Zhongman Petroleum and Natural Gas Group seeks to sink no less than 66 different wells in order to retrieve half a million barrels of oil per day.  China represents the biggest player in the Iraqi game, but by no means the only one.  ConocoPhillips (COP on the New York Stock Exchange, trading for $65.49 per share) snapped up the Bai Hassan field in 2014, giving the company an estimated reserve of over two billion barrels.

The Enemy Within

No analysis of Iraqi oil can go without an analysis of the nefarious terrorism group Islamic State in Iraq, or ISIS/ISIL.  ISIS seemed nearly irrelevant just a month ago after the death of the movement's number two leader Abu Alaa al-Afri.  Since then, however, the fundamentalist group that preaches Sharia law and death to foreigners has seized the Syrian city of Palmyra and the Iraqi city of Ramadi.  Most threatening to the oil world, they've advanced on the northern Kurdistan region of Iraq, making all but the most risk-tolerant of foreign investors double-check their holdings.  Afren Petroleum (AFR on the London Stock Exchange, trading for $4.88 per share) suffered the largest loss in the oil industry as ISIS defeated the Kurdistan peshmerga militia in April, dropping nearly five percent in value after announcing they would mothball the Barda Rash oil fields to wait out the storm.  Chevron (CVX on the New York Stock Exchange, trading for $105.57 per share) announced they would withdraw all workers from the region due to security concerns.  ISIS has largely been contained in the relatively oil-poor western regions of Iraq; expansion into the eastern half of the nation could devastate oil production, but the insurgent group will have to go through heavy military power to reach the verdant oil fields that foreign entities have prized so highly.

Takeaway Of The Takeaways

If you've filled up your gas tank recently, you know that the price of oil has rebounded after a particularly disastrous 2014.  With oil above the all-important $50 per barrel marker (and flirting with $60 per barrel), a number of companies are hoping to ramp up production worldwide.  Oil futures have stabilized at around the $60 threshold for the past six weeks, indicating that we've reached a lull in the market for the foreseeable future.  While oil itself won't increase in value drastically -- again, unless ISIS seizes a high-value target -- shares of the companies producing oil represent a better opportunity for short-term growth than the commodity itself.

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