Iraq is OPEC’s second-largest oil producer and boasts the world’s fifth-largest proven oil reserves. Although the majority of Iraq’s known oil fields are currently producing, above-ground issues such as political instability, security threats, and limited infrastructure have prevented Iraqi production from soaring as much as optimists had hoped. Still, the possibility that conventional Iraqi production might increase in the future could threaten the diffusion of new production technologies: If Iraq manages to produce more oil at significantly lower costs relative to other countries, there will be less demand for the higher-cost oil extracted through fracking and horizontal drilling.
In 2014, Iraq was the second-largest contributor to the growth in global oil supply; only the United States added a larger share. The same year, Iraq exported 2.6 million barrels of crude oil per day, with China as its biggest export destination. Because of higher U.S. oil production, Iraq’s exports to the United States have fallen by 30% since 2005. Iraq’s energy resources are easy to extract and are located in simple onshore geographic areas that are largely unpopulated. As a result, the country has extremely low production costs (about $6 per barrel); only Saudi Arabia can produce oil more cheaply. By comparison, U.S. shale costs about $73 per barrel to produce.
The bulk of Iraq’s crude oil exports come from the country’s southern fields. Baghdad’s disputes with the Kurdistan Regional Government continue to hamper progress in oil production in northern Iraq. The Kurdish government passed a hydrocarbons law that was at odds with the Iraqi Oil Ministry, and by signing oil deals with Iran and Turkey, it circumvented the ministry’s requirement that all contracts must be signed with the national government and shipped via the State Oil Marketing Organization. The tension between Baghdad and Arbil has led to payment disputes, security problems and delays in building additional infrastructure. However, in December 2014, Baghdad and the Kurdistan Regional Government agreed to a preliminary deal on oil exports and revenues, signaling progress toward a common objective.
Iraq is slowly recovering from a long period of underproduction caused by wars and sectarian violence, but the country must overcome several major challenges before it can fully capitalize on its wealth of hydrocarbon resources. The most obvious of these is political instability and violence stemming from the ongoing conflict with the Islamic State, which has resulted in intermittent supply disruptions in northern Iraq. The majority of pipelines there are inoperable because of damage from conflict. Bottlenecks also continue to exist because of a lack of export infrastructure and limited storage capacity. Additionally, inefficient administrative policies make it more difficult for international oil companies to conduct business in Iraq.
If Iraq manages to address its above-ground security issues and further boost its conventional production, it would push global oil prices even lower than they already are, reducing the incentive for countries to produce oil under more difficult and costly circumstances, such as in shale or deepwater basins. Iraq’s potential reserves are so large that, if brought fully online, they could push new production technologies out of the global market. On the other hand, if Iraq’s security situation worsens to the point of forcing significant amounts of Iraqi oil production offline, it could create a dearth of oil supplies in the global market, making more room for the use of pricier production technologies.