ISIS poses a threat to Iraq’s economy

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This photo taken on February 3, 2009, shows an engineer walking past chimneys at the Barjisiya oil fields in Zubair One south west of the city of Basra, 550 kms from Baghdad. (Photo: AFP-Essam al-Sudani)

By: Hassan Chakrani

Published Saturday, June 28, 2014

It was a historic moment in 2011 that brought many questions and challenges too: Iraq’s output had crossed the threshold of 2.5 million barrels per day, for the first time since President Saddam Hussein was overthrown. This coincided with the completion of U.S. military withdrawal, following a strict timetable.

Since then, Iraq has been in an awkward and dichotomous state: While oil revenues grew dramatically, inter-communal relations among religious and ethnic groups, which were supposed to benefit equally from the wealth, deteriorated. Recall that this wealth was one of the main motives for the U.S.-led invasion, the event that precipitated long-lasting social and economic calamities in Iraq.

Many started using oversimplified equations to give economic data certain political connotations and advance certain points of view. For example, between 2010 and 2013, the Iraqi government’s revenues from oil production almost doubled to $100 billion. If this increase alone were distributed equally among Iraqis, each family would get $10,000. But it wasn’t.

In effect, this figure had the potential to launch nothing short of a socio-economic renaissance among all communities of Iraq, including Shias, Sunnis, and Christians, in the area between Mosul, Rutba, and Basra. Moreover, if the oil revenues had been invested in a reasonable way, they could, for example, have helped rebuild the infrastructure for the electricity sector that was destroyed during the invasion. Instead, and despite dozens of billions thrown at the problem, the result was a return to the same levels of power supply that existed under Saddam.

Today, only a quarter of Iraqis have access to clean sanitation. Many of them feel that they have suffered great injustice, with little or no money spent on securing their most basic daily needs.

Let’s put any populist approach to the distribution of public funds aside. Iraq is a country torn by disparate interests: first, there is the Shia community, which is fond of its newfound dominance resulting from its demographic majority and geopolitics. Then there is the Sunni community, which is split into those who do not accept the Shia dominance, and those who, like the so-called tribal “awakening” groups, feel they are oppressed even though they had supported the government’s anti-terrorism efforts since 2008. Last but not least, there is the Kurdish community, which has had de facto independence for nearly half a decade now.

The country was already fragmented before the onslaught led by the Islamic State of Iraq and Syria (ISIS). This is extremely unfortunate given the enormous potentials of the Iraqi nation.

Iraq is widely considered the most important country in OPEC going forward. Iraq will account for 60 percent of the growth of OPEC’s output up until 2019, by which date Iraq’s output would have risen by 1.28 million barrels per day.

In the medium term, recent forecasts by the International Energy Agency (IEA) indicated that production would reach 3.87 million barrels per day in 2015. Based on the high oil prices recorded after ISIS’ takeover of Mosul, this output would translate into revenues of up to $450 million per day.

The ISIS juggernaut could expand with attacks on the oil-rich southeast. If successful, these could cut off revenues to the central government from the oil production there, which could further erode its authority and ability to govern.

The worst-case scenario involves Baghdad itself. Though it is unlikely that the city of seven million would fall to ISIS, any clashes or unrest there could severely impact oil supplies and logistics.

Losing Iraq’s oil would be a disaster for the region and the world. A decline by one third in Iraq’s output would evaporate OPEC’s spare productive capacity, and would force developed nations to tap into their strategic reserves.

Most likely, the advance by ISIS and other allied groups, who do not have more than 15,000 fighters combined, will be halted, but Iraq will not be a paradise of coexistence any time soon. Yet we must not lose sight of the fact that Iraq’s current conflicts are but an extension of historical conflicts in the region and beyond, fueled by years of deprivation, injustice, and Western sanctions, which alone were responsible for nearly half a million fatalities among children.

The current conflict could easily lead to the disintegration of the country and deepen the gaps among its communities. It is a civil conflict that resembles many conflicts seen in the region, where economies were destroyed and dreams of stability and prosperity were quickly shattered.

In Lebanon, for example, despite the fact that the GDP in 2010 had finally returned to pre-civil war levels, the per capita GDP hasn’t, even though 20 years had passed. This is while bearing in mind that this indicator is not a comprehensive benchmark from a developmental perspective.

A study prepared recently by Randa Saab for the International Monetary Fund tackled the issue of the economic impact of Middle East conflicts. Saab concluded that a country’s oil wealth could help put it back on the path to growth after the end of conflict.

The study covered, in addition to Lebanon, Kuwait and Iraq. The study found that Iraq’s GDP recovered its pre-invasion levels only a year later, while per capita GDP recovered five years later, though the study mentioned that despite strong growth, economic management was poor as a result of deteriorating political and security conditions.

This was during the invasion. But the “ISIS era” may prove different. Radical Islamist groups have started building their “emirate” on foundations that may be hard to undo. This is a source of great concern for the five million families of Iraq, who fear for the future of their children in a country where oil revenues alone are to the tune of half a billion dollars a day, with an economy worth $210 billion – a country that is being torn apart before their very eyes, while its wealth is being set on fire.

De-Facto geography

October 2012 is not too far in the past. At the time, the IEA published its forecast for energy demand in the coming decades. Based on one scenario, Iraq’s crude oil output would increase to 5 million barrels per day, a milestone that could help meet additional demand for energy globally. In the current decade, it was predicted that Iraq would account for around 45 percent of the expected growth in production worldwide.

Today, things are a bit different. The bloodletting in Iraq has returned, and the narrative has shifted to how to achieve economic stability in war conditions, in a country with more than 30 million people. Analysts speak of de facto geographical boundaries between Shia and Sunni-majority regions. True, these demarcation lines will not impact production in areas that are essentially controlled by the government in Baghdad in the near and medium terms, but they could yet hurt the oil sector, for example with suicide attacks on oil installations and pipelines.

Follow Hassan Chakrani on Twitter @HassanChakrani

This article is an edited translation from the Arabic Edition.

Comments

There is something wrong with the picture ?
The mans shadow is directly behind him.
Which means he is walking towards the sun.
All other shadows do not correspond with his shadow ?

The picture was taken 2009
How is production today - 2014
It is being said more & more, that the Middle East is fast approaching the day when the oil wells will be dry ?
If these stories are true, how will the Middle East survive without oil revenue ?

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