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Iraq is facing severe economic headwinds, a widening fiscal gap and a worsening security situation that is mounting political pressure on Baghdad as the country’s oil exports remain suspended amid the raging war in the Middle East.
Oil exports, the country’s economic lifeline, have been severely disrupted by the widening US-Israel war against Iran. The conflict, which began on February 28, has led to the effective closure of the Strait of Hormuz by Iran. About 20 per cent of the world’s crude supply – including Iraq’s crude shipments loaded from the southern terminals in Basra – pass through the narrow waterway.
Iraq produced about 4.35 million barrels per day and exported about 3.4 million bpd before the war, which has come to a near standstill. With the war now in its third week, Baghdad is moving urgently to find alternative ways to ship its oil to global markets to fuel its economy.
“This is a polycrisis shock for Iraq: economic, fiscal, military/security and political,” Nasser Saidi, president of Nasser Saidi and Associates and former economy minister of Lebanon, said.
Iraq, along with the Gulf's hydrocarbon producers, except Oman, ship most of their exports through the Strait of Hormuz. Bahrain, Iraq, Kuwait and Qatar ship between 87 per cent and 95 per cent of their total exports through the strait, according to Fitch Ratings estimates.
“We estimate each week of closure will reduce hydrocarbon export proceeds by around 0.4 per cent of GDP [gross domestic product] for these four sovereigns, based on data for 2025 shipments through Hormuz and an assumed oil price of $85 a barrel during the closure,” Mohamed Afifi, senior analyst at Fitch Ratings, said.
The task to stave off the impending crisis for policymakers in Baghdad is herculean to say the least. The country relies on the sale of hydrocarbons for 90 per cent of its revenue. With production reduced significantly and exports at a standstill, Iraq's revenue stream from the sector, which averaged slightly more than $6 billion a month last year, is lost, according to figures from Iraqi oil and finance ministries.
Mr Saidi said Iraq is the least prepared of regional oil producers to face the fallout of the war.
“Economically weak and vulnerable, the country faces internal political divisions and ethnic divides, in addition to the security risks from its borders with Iran, Turkey and Syria,” he said. “It has neither modernised its old energy infrastructure nor diversified its economy, trade or finances.”
Energy infrastructure under attack
Tehran’s retaliatory strikes on the energy infrastructure of its Arab neighbours has added another layer of uncertainty in the global energy market. Qatar has already shut its gas production operations. The UAE said this week that operations were suspended at its Shah gasfield after a drone attack. Saudi Aramco also shut operations at its Ras Tanura refinery early this month after a fire broke out following a drone attack.
Iraq’s energy infrastructure has also come under attack, curtailing the country’s hydrocarbons production significantly. Its Majnoon oilfield, which has already suspended crude production, was attacked again on Monday. Iraq also suspended its oil port operations on March 12 after two tankers carrying fuel were hit in its territorial waters near Basra.
Although there have been incidents affecting Iraqi oil related infrastructure, “the damage has been small, with no reports of major destruction and repair costs are likely to be shared with international partners”, Mr Afifi said.
“Our baseline scenario assumes the strait will remain effectively closed for up to a month, with no major damage to energy production and transport infrastructure. This would result in Iraq losing up to a month's worth of oil export receipts,” Mr Afifi said.
Fear tactic
The daily attacks by Iran-backed militias on Iraq's Kurdistan region have also forced operators to shut down operations, taking off 200,000 bpd of the region's oil production that used by be exported through Turkey’s Mediterranean Port of Ceyhan, according to oil company officials.
Drone attacks in the vicinity of Rumaila and Majnoon oilfields in the south is more of an attempt to force the companies to shut down operations, the officials said.
Huge problem
The events in the past two weeks have “caused us a problem”, Iraqi Oil Minister Hayan Abdul Ghani said in a statement sent to foreign media on Thursday.
The government was forced to decrease production to about 1.4 million bpd to be sent to refineries, down from around 4.3 million bpd, he said.
Iraq is now desperately looking for options, and it also in contact with Iran to allow some oil tankers shipping Iraqi oil to pass through Strait of Hormuz, Iraq’s state-run news agency quoted Mr Ghani as saying on Tuesday.
It is however not clear what stage the Iran-Iraq talks are at the moment. Its other options include shipping up to 200,000 bpd across land through Turkey, Syria and Jordan.
KRG conundrum
The second is to pump at least 150,000 bpd through the Kurdistan Export Pipeline (KEP) to Turkey’s Metatherian port of Ceyhan, but a financial dispute between the federal authorities in Baghdad and Kurdistan makes it a difficult proposition to execute.
The pipeline is owned by the Kurdistan Regional Government (KRG) and is operated by the Kurdistan Pipeline Company (KPC).
The KRG has said it will not agree to pump oil until Baghdad removes a customs policy imposed in January. The new system is part of a wider reform plan introduced by Baghdad to impose more control on imports and tariffs and eventually end money laundering and corruption.
It also said last week that “outlawed militias” made oil, gas and energy fields “targets of their attacks”, taking production offline and leaving “no oil available for export”.
Baghdad has taken “no effective measures” to stop the assaults and claimed “many of the perpetrators … receive salaries and support from Baghdad”, KRG said at the time.
On Tuesday, Iraq warned the KRG of legal action over its refusal to allow oil exports, accusing Erbil of breaching the Iraqi constitution.
However, even if Baghdad manages to resolve differences with the KRG and strikes a sweet deal with Iran on passage through the Strait of Hormuz, Iraq’s economic woes and its policy independence troubles are far from over, Mr Saidi said.
“Iraq is the only major sovereign nation whose primary revenue stream (from oil) is held in a foreign central bank (the Fed), giving the US substantial power over Iraq’s domestic governance,” Mr Saidi said.
While Iraq’s central bank claims to have about 11 to 12 months of import cover, this liquidity is still in NY Fed-controlled accounts.
The country's international reserves stood at $97.5 billion as of November, according to the Central Bank of Iraq.
The country imports about 90 per cent of its consumer goods, food, and medicine and is “financed by the petrodollar held at the Fed”, Mr Saidi said.
“The large informal economy (an estimated 60 per cent of non-oil GDP) will also be vulnerable to the current Hormuz shutdown,” he added.
