Iraq rise will upset OPEC power balance

June 12, 2012

By Una Galani and Christopher Swann

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Iraq’s rise is upsetting OPEC’s power balance. For the last decade, the oil cartel has let the Gulf country produce crude without an output quota. The exemption allowed Iraq the freedom to invest in its war-damaged oil industry. That reconstruction is picking up pace – production is now higher than before the U.S.-led invasion in 2003. Iraq is set to overtake Iran as OPEC’s second biggest producer. The rapid increase in output is an urgent challenge for OPEC’s oil ministers who are meeting this week in Vienna.

At one time, Iraq hoped to match Saudi Arabia’s capacity of 12 million barrels per day by 2017. That was too optimistic for the infrastructure-poor and bureaucracy-heavy nation, but even half that would still make Iraq a big power inside OPEC. That will be especially true if Iraq succeeds in its plan to build significant spare capacity, making the country a rival swing producer to the Saudis.

Already, Iraqi oil is helping to fill the supply gap created by tightening Western sanctions on Iran. The cartel’s hawks are unhappy about those extra barrels; prices have fallen one fifth from their March peak. Of course, Iraq is not the cartel’s only problem. The group failed to agree on national quotas at its last fractious meeting in December, and OPEC’s total production is running about 5 percent above the then agreed production ceiling.

If Iraq’s rising output isn’t calibrated with the market’s ability to absorb it, oversupply could become chronic and prices could fall further. Iraq has said that it would like to rejoin OPEC’s quota system in 2014. Rivals may now want that to happen sooner even though Iraq will seek a large quota to reflect its high level of reserves.

The negotiation will be delicate. Iraq won’t want to slow growth, but other member nations, which need maximum production to balance domestic budgets, won’t be rushing to answer the call for compensating cutbacks. While the recent price decline should concentrate minds – and everyone knows that OPEC will be stronger with Iraq inside and onside – painful adjustments never come easily.

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