As if things weren’t already chaotic enough when it comes to Iraq, now there’s a new cause for concern. Just recently, Iraq booted Iran off the #2 spot for OPEC production, meaning Iraq is now second only to Saudi Arabia in terms of oil producing OPEC members.
Oil prices are hovering around $108/barrel. Should they begin to fall—and that’s a real possibility considering the worldwide swing toward shale and other unconventional reserves—OPEC will almost certainly slash production in order to stoke demand (and thus keep prices high). The question is, who’s going to make the first move?
"Iraq will never cut production," said Iraq's OPEC Governor Falah Alamri. "Some countries that have increased their production in the last two years - they should do so. This is a sovereign issue, not an OPEC issue."
Just this past summer, Saudi Arabia pushed production over 10 million barrels per day in order to keep oil prices stable, coming after sanctions caused Iranian production to drop sharply.
Following that move, OPEC opted to keep production at a level of 30 million barrels/day with further deliberations to come at the end of May next year. But as of November, after Saudi Arabia reduced production to around 9.5 million bpd, overall OPEC production leveled off at 30.8 million bpd.
OPEC’s own forecasts for 2013 suggest that demand will slow even further—to something like 29.25 million bpd. That means somebody will need to curb production. If production remains so high, prices are going to crater. That’s where Iraq’s strengthening position appears a real worry.
It is, after all, the world’s fastest growing exporter of crude. And, driven by foreign companies’ developmental work, the country expects even more gains in 2013.
Companies like Royal Dutch Shell (NYSE: RDS.A), Exxon Mobil (NYSE: XOM), BP (NYSE: BP), and Eni (BIT: ENI) are all seriously invested in Iraq’s oil operations. Today, Iraq’s oil flows are up 1 million bpd from three years ago, figuring at around 3.4 million bpd.
Given that nations like Iran or Venezuela will almost certainly resist any attempts to curb production, OPEC will have a real problem on its hands should Iraq’s booming production continue (or worse, scale up). Saudi Arabia would certainly balk at having its hand forced.
But there's one interesting light on the horizon for oil prices. The Western world continues to be involved in Iran and its troublesome nuclear program, while Israel continues to exert a powerful monitoring force. This delicate political dynamic has—so far—kept oil prices high.
OPEC can keep in a holding pattern, but only for now. There will be big changes to the OPEC hierarchy and dynamics soon.