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Brace yourself for the Iraq oil shock

Brace yourself for the Iraq oil shock

It’s not just the Iraqi people who are paying the price for Barack Obama’s negligence.  You’re going to be paying it at the pump, in a big way, and quite possibly in a permanent way.  Recall that one of the reasons for both Gulf Wars was to prevent the dictator Saddam Hussein from manipulating the world’s oil supply.  ISIS will be, if anything, an even worse custodian of the “oil weapon.”  Unfortunately, President Obama has also acted to block the Keystone XL pipeline, choking off a supply of oil that would have helped insulate the American consumer from the effect of Iraq’s oil fields falling to al-Qaeda and allied insurgents.  The best thing we’ve got going for us is the private-sector energy development that Obama couldn’t stop.

USA Today checks in on developments at Iraq’s biggest oil refinery, where an attack by “militants” has been thankfully repelled… but it wasn’t easy.

Chief military spokesman Lt. Gen. Qassim al-Moussawi announced that government forces had retaken control of the Beiji refinery shortly after Reuters, citing unnamed security sources and refinery employees, reported that the refinery may largely be controlled by insurgents.

“The militants have managed to break in to the refinery. Now they are in control of the production units, administration building and four watch towers. This is 75% of the refinery,” an official speaking from inside the refinery told Reuters. It was not clear why the official spoke on the condition of anonymity.

Prime Minister Nouri al-Maliki, however, assured the nation that his government has regained the initiative after the “shock” defeat of army and security forces in the country’s north.

“We were able to contain the strike and arrest deterioration. … We have now started our counteroffensive, regaining the initiative and striking back,” al-Maliki said.

Even if the Iraqi government is able to hold the refinery, it’s going to be a while before it gets back up to speed, given that workers had to be evacuated.  A number of foreign oil workers were reportedly abducted from the oil city of Kirkuk, including some Turks, which is not going to sit well with the already angry Turkish government.  That’s also going to make oil workers understandably nervous about staffing facilities that might come under renewed attack.

The Kurds are now in control of Kirkuk, and are probably going to make it the crown jewel of their new independent state – an idea Turkey no longer seems determined to veto.  Reuters reports the Kurds are already busy hooking Kirkuk’s refineries up to their own oil pipeline.  In the long term, that could work out well for global markets, but for the moment insurgent activity is keeping the Kirkuk oil spigots closed.

The invaders are well aware of the strategic and psychological significance of Beiji, so they’ll probably hit it again, and harder.  As USA Today explains:

Clashes between Sunni Muslim militants from the al-Qaeda breakaway group known as the Islamic State of Iraq and the Levant — referred to as ISIL or ISIS — are also continuing Wednesday in areas to the north of Iraq’s capital Baghdad.

But if the Baiji refinery were to fall it could prove to be a dramatic new twist in the story and may have a big impact on supplies in Iraq and potentially across the world. Iraq is a major supplier of the world’s oil.

“An increasing risk of supply outages in Iraq comes against a backdrop of an already tight global demand/supply balance that has markets already on edge,” IHS energy experts wrote in a recent note.

The Wall Street Journal’s Marketwatch followed nervous oil markets getting ready to panic if Beiji fell, stabilizing after word came that the Iraqi government was repelling the attack.  The long-term forecast doesn’t look good:

The International Energy Agency said Tuesday it now expects Iraq’s oil output to grow by only 1.3 million barrels per day to 4.5 million barrels per day by 2019.

“This would give rise to a production level only roughly half as high as that targeted by the Iraqi government. The IEA previously also envisaged more marked growth in Iraqi oil production,” said analysts at Commerzbank in a note.

Iraq is expected to account for 60% of the output increase by the Organization of Petroleum Exporting Countries by 2019. The missing supply, said the analysts, will need to come from other countries, and in the longer term, this points to higher oil prices.

What happens if ISIS does grab more of the Iraqi oil fields?  MarketWatch says in that scenario, “$200 oil is next.”  That’s about double what it is now, folks.  President Obama might finally get the $8 gas he and his Energy Secretary wanted, early in his term.  Part of the problem is that only four of the 12 OPEC oil-producing nations were in good shape before this… and Iraq was one of the good ones.  The bummer states include Obama’s foreign policy triumph of Libya, a battleground of feuding warlords where it takes 645 days to arrest a terrorist who is living as a bon vivant man-about-town, and the worker’s paradise of Venezuela, where the government is currently rationing tap water.

Many bets are being placed upon Saudi Arabia’s ability to single-handedly pick up the slack for diminished oil production from the troubled nations, which was considered a long shot even before Iraq went up in smoke.  The idea of Saudi Arabia controlling even more of the global economy wasn’t encouraging, but if Iraq boils over into a regional war of Shiites against Sunnis, either Saudi production will tank… or maybe we’ll end up with a nuclear-armed Iran controlling their oil fields.  How’s that grab everyone?

Well, at least we can take comfort in knowing a surge in oil prices won’t drive up inflation… because the government deliberately factored oil out of its inflation calculation long ago.  That’s why you read headlines about how inflation has been conquered, even as everything around you gets more expensive, there’s less money in your pocket, and your grocery purchases include less product, even though the sticker price hasn’t changed.   The New York Post reported today that meat, poultry, and fish prices spiked 8 percent over the past year, hitting an all-time high:

Ground beef at mid-level-priced grocery stores costs about $4.59 per pound, tilapia costs $5.99 per pound and pork chops cost $3.99 per pound — all marked up between 30 and 40 cents per pound since last year, Hopkins said.

It’s crazy — sometimes you just can’t buy meat,” said Ana Meca, 41, who was shopping for her family of five at Associated on Tuesday. “I have some pasta at home so I will just make that tonight. It’s cheaper.”

Meat, poultry and fish prices have risen an average of 7.7 percent nationally since last year, according to the US Department of Labor statistics.

Nationally, ground beef rose from an average of $3.31 to $3.85 per pound from May 2013 to May 2014. Bacon increased from $5.09 to $6.04 and sirloin steak spiked from $6.79 to $ 7.58 per pound during the same time period.

Meat, poultry and fish rose 1.4 percent nationally in the past month — the sharpest increase since 2011. During that month, the price of whole chickens increased from $1.53 to $1.56 per pound, bacon increased from $5.69 to $6.05 a pound and ground beef increased from $3.89 to $3.85 a pound, according to the data.

And it may only get worse.

“They’re expecting a big increase come July again,” Hopkins said. “I think it will affect [the deli] stronger into the coming summer season.”

Just watch what happens if the price of oil skyrockets, and the cost of distributing those groceries increases.

Update: While the Iraqi government continues to insist it has control of the big oil refinery in Beiji, eyewitnesses on Thursday reported seeing the black flag of the insurgents flying over it.

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