Wild card Iraq keeps oil market on edge
By Peg Mackey
BAGHDAD (Reuters): As world oil markets balance on a knife- edge, Iraq once again has the power to tip the scales, analysts said last Friday. Crunch time could arrive next month.
Baghdad says it might slash crude exports by another 250,000 barrels per day (bpd) in March should the United States continue to block spare parts contracts for its ailing oil sector.
Such a move could lift high prices to yet loftier levels, angering import-dependent Washington and underlining Iraq's sway over a market it has dominated for the better part of the 1990s.
Ironically, Iraq has raised the possibility of lower exports just as its OPEC colleagues toy with turning up the taps to cool down oil markets and replenish depleted petroleum stockpiles.
Iraq last played the oil card in November when it suspended exports for three weeks in protest against stop-gap extensions of the United Nations' oil-for-food exchange with Baghdad.
But Iraqi officials say that this time round there is no political motivation behind any potential decrease in oil sales.
"This is not a political protest. It is a preventative measure," a senior Iraqi oil official said.
"We don't want to damage our industry."
Crumbling infrastructure isn't the only worry.
Jittery markets are also fretting about what Iraq will do when export revenues hit Baghdad's self-declared ceiling of US$5.2 billion, a point that could be reached by the end of March.
Will Iraq stop exports completely -- a move that could add another bullish turn of the screw to an already tight market -- or will Baghdad just pump on regardless?
That revenue cap, set in a previous round of the three-year -old oil program, was removed in December by a UN resolution aimed at returning UN arms inspectors to Baghdad. Iraq rejected the resolution and urged a complete end to sanctions.
But for oil dealers alarmed by the dilapidation of Iraq's oil industry, spare parts provide the most immediate worry.
Ramping up exports to 2.3 million bpd towards the end of last year apparently caused some irreversible damage to Iraq's reservoirs.
As a result, Iraqi officials already have reduced exports by about 300,000 bpd to 1.9 million bpd during the current seventh phase of the UN oil-for-food deal.
While there is universal agreement that Iraq's oil industry is on the verge of collapse, some Western diplomats and analysts don't deny there is scope for Iraq to play politics.
"Baghdad could well decide to reduce export levels to pressure the (United Nations) Security Council into freeing up spare parts contracts," a western diplomat said.
While $250 million of oil sector equipment has arrived in Iraq, close to $300 million worth of badly needed kit is on hold thanks primarily to the United States, diplomats said.
"The danger for Washington is that if Iraq's oil exports go down, the focus goes back on U.S. behavior on the humanitarian issue," said Washington-based Iraq analyst Christine Helms.
"Over the last couple of years, whenever there has been a new humanitarian blip on the screen, the United States has backed down."
And given the current backdrop of blistering oil prices and depleted oil inventories, "the United States might think twice about picking a fight with Iraq," said Raad Alkadiri, an Iraq analyst at Washington-based Petrofinance Consultants.
Iraq recently has been selling about 700,000 bpd into the United States via third parties.
"The United States might take the heat off themselves by rushing through a number of (spare parts) contracts and then drag their feet again down the line," Helms added.
Iraqi exports could recover to between 2.2 million bpd and 2.3 million bpd provided equipment and spares arrive, Iraqi oil officials said.
But some Arab diplomats say Washington might keep its grip on spare parts flows for some time to come.
They believe the United States is putting contracts on hold on purpose to force Baghdad into accepting weapons inspections under December's UN resolution 1284.
"It's going to be a long problem," said an Iraqi government official.