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The Debate over Iraq War and Oil

Question 1 The real reason for the invasion

The American people were not unanimous in their support of the March 2003 invasion on Iraq. Former President George W. Bush defended the invasion of Iraq as a necessary action against terrorism after Iraqi tyrant Saddam Hussein was toppled and his country's WMDs were found. Lawmakers voted against the war because they thought that Iraq's oil supply would be in jeopardy (Longley, 2021). Nevertheless, in a speech given in February 2002, then-Defense Secretary Donald Rumsfeld alluded to that "total nonsense" smooth statement as "complete nonsense."

According to a number of senior military and political officials in the United States, oil was clearly the driving force for the Iraq War.

"Off sure, it's about oil; we can't actually dispute that," former US Central Command and Military Operations in Iraq chief Gen. John Abizaid remarked in 2007. According to Alan Greenspan's autobiography, " That it is politically difficult to acknowledge what everyone already knows: that the Iraq war is mostly about oil, disgusts me." People say we are not involved in an oil-related fight," then-Sen. Chuck Hagel (now Defense Secretary) said back in 2007, when he was a senator. Without a doubt, "We are"

Some of the world's largest oil reserves are being tapped by Western oil companies, who are reaping huge profits after boosting production of oil in Iraq for the first time in over 30 years. As a result, although the United States continues to buy Iraqi oil at a reasonably consistent level, the benefits have not trickled down to the country's economy or society as a whole. Furthermore (Juhasz, 2013).

A decade of pressure from the US government and oil industries led to these predetermined results. As Chevron's then-CEO, Kenneth Derr expressed his desire for his company to be able to own Iraq's large oil and gas reserves in 1998, saying, "I would unreservedly want Chevron to be able to possess Iraq's tremendous oil and gas resources," which he already does (Juhasz, 2013)."

As in previous elections, Big Oil spent more money to elect Bush and Cheney as president in the year 2000. This included ExxonMobil, Chevron, BP, and Shell, among others. Bush's presidency had hardly started when the National Energy Policy Development Group was formed to bring together government officials and oil sector executives to plan the country's future energy supply. – Cheney In March, the task force reviewed over the lists and maps depicting Iraq's total oil production capacity.

Almost quickly, military plans were put into action. Former Treasury Secretary Paul O'Neill observed in 2004: "By February of that year (2001), logistics had become the main topic of discussion. Instead than asking "why," ask "how" and "how quickly" (i.e., invade Iraq)." "Opening up segments of their energy sectors to global investment" was suggested by the task group in its final report, which was issued in May 2001. To far in Iraq, this is precisely what has been achieved (O'Neill, 2003).

To capture real estate or natural resources, such as oil, from other countries, the United States does not mobilise its troops and travel across the world." Rumsfeld said, "That's not how we do things in the United States. That is something we have never done before, and we will never do again. The way democracies operate is not like that. In 2003, the Iraqi sands were rich in oil, and there was plenty of it. Regardless of the bullshit (Commdocs, 2021).

Military and Political Officials' Views on Oil and the Iraq War

"Iraq had proved oil reserves of more than 112 billion barrels at the time, making it the world's second biggest producer after Saudi Arabia," according to US Energy Information Administration estimates. As well as having 110 trillion cubic feet of natural gas, Iraq is a security hotspot in the Middle East and throughout the globe." According to the EIA, Iraq has the fifth-largest known crude oil reserves in the world and was the Organization of the Petroleum Exporting Countries' second-largest crude oil production (OPEC) (Commdocs, 2021).

EIA claimed in a 2003 background study that Iraq's economy, infrastructures, and society had suffered considerably as a result of the Iran-Iraq conflict, the Kuwait war, and punitive economic sanctions throughout the 1980s and 1990s, particularly during the Persian Gulf War (Szczepanski, 2019). Whilst GDP and living standards in Iraq fell after the country's disastrous invasion of Kuwait, an increase in oil output from 1996 as well as an increase in oil prices until 1998 has resulted in projected real GDP growth in Iraq of 11% in 1999 and 11% in 2000, according to government estimates. According to predictions, Iraq's real GDP would have stalled in 2002 after expanding by just 3.2% in 2001 (Kolodkin, 2019). The following are some noteworthy features of the Iraqi economy:

  • Iraq's inflation rate was expected to be over 25 per cent in 2012.
  • Iraq had significant levels of unemployment and underemployment.
  • Iraq had a goods trade surplus of around $5.2 billion, however, a large portion of this was obtained when Iraq was under UN-sanctioned-rule (Szczepanski, 2019).
  • Iraq was saddled with a massive financial load, which might reach as high as $200 billion (or perhaps more) if obligations to Gulf nations and Russia are included.
  • Iraq also lacked a proper revenue framework and was subjected to unstable fiscal and monetary policies.

With 112 billion barrels in known oil reserves, Iraq was second only to Saudi Arabia in terms of production in the world despite years of strife and sanctions. But according to the EIA, 90% of the country's oil reserves are still untapped. According to the EIA's projections, Iraq might have produced an extra 100 billion barrels of oil if its untapped areas were discovered. Iraq's oil production costs are among the lowest in the world. However, in comparison to the approximately 1 million wells that were drilled just within the state of Texas, Iraq had only a few thousand wells (Longley, 2021).

Iraq's oil output fell from 3.5 million bp/d in 1990 to roughly 300,000 bp/d as a consequence of the disastrous invasion of Kuwait in 1990 and the accompanying trade embargoes. Oil output in Iraq restored to around 2.5 million bp/d in February 2002, as per the International Energy Agency (IEA). This year's target to increase oil production by 3.5 million barrels per day (BPD) by the end of the year was unfeasible due to a variety of technical difficulties. There are reports that Iraq argues that the UN has prevented it from increasing its production capacity by not supplying all the equipment it has sought for its oil industry.

Iraq's sustainable production capacity, according to the EIA's oil industry specialists, is no more than 2.8-2.9 million BPD, with a net export potential of 2.3-2.5 million BPD, according to the EIA. Iraq, on the other hand, produced 3.5 million BPD in July 1990, just before it invaded Kuwait and began its oil production boom (Longley, 2021).

With regard to military, political, and economic activity, whether or not oil was the driving impetus for the United States invasion of Iraq, oil has always been an important aspect of American foreign policy. Truman was worried that the Soviet Union might seize control of the Middle East's oil supplies after World War II. Interestingly, the Truman administration's policy was based less on defending the oil fields against a potential Soviet invasion than it was on preventing the Soviet Union access to the oil reserves if it were to attack the country (Nerurkar, 2012).

Big Oil Companies' Involvement in the Iraq War

The government moved fast to prepare a comprehensive strategy, which was approved by President Truman in 1949 as National Security Council (NSC) 26. British and American oil companies, as well as the British government, devised a scheme to smuggle explosives into the Middle East without permission from regional governments (Mabee, 2011). When alternative options have been explored, the oil factories and refineries would be razed and the country's rich oil reserves would be shut to prevent the Soviet Union from using them.

The Truman administration investigated the possibility of complementing conventional bombs with "radiological" weapons at one time. However, as disclosed in declassified papers, the Central Intelligence Agency rejected the plan in June 1950, citing national security concerns. "For the purpose of preventing an adversary from exploiting oil riches, radiological technologies may be used, but this will not prevent him from enticing "expensive" Arabs to go to contaminated regions and open wellheads," the CIA said. As a result, apart from the negative impacts on the Arab population, it is not regarded feasible to use radiological measures as a conservation tool (Jackson, 2013).

Eventually, the plan was put into action, and explosives were transported to the affected area. Concerns over Middle Eastern oil increased in 1957, prompting the Dwight Eisenhower administration to strengthen the strategy as concerns of regional instability escalated after the Suez conflict. It seems from declassified records that the plan — as well as the explosives — was in place at least until the early 1960s (Smith, 2016). In Washington, the conventional opinion is that Iraq and Iran will persist to be aggressive, dangerous regimes that shelter and support terrorists in their territories. Because of this, one of the objectives of American involvement in the area continues to be to prevent them from encroaching on Saudi oil resources, therefore depriving them of extra oil profits.

Iraq's crude oil output has increased significantly during the previous five years, despite security and financial difficulties. What obstacles does Iraq's oil industry face as the year 2017 begins to unfold? Iraq's oil output has increased by two million barrels per day (b/d) since 2010, reaching a record high of 4.4 million barrels per day (b/d) in the third quarter of 2015. The increase may be attributed in part to the efforts of legislators to increase oil output in order to create much-needed revenue at a time when the Iraqi government is struggling to keep Islamic State terrorists in check in the country's northern and eastern regions. Looking forward to 2016, Iraq's oil reserves is dependent on the resolution of a number of political risk problems that the country's authorities must handle in order to sustain high levels of production. Oil reserves in Iraq are the fifth biggest in the world, with a total of 140 billion barrels, and the country is a member of the OPEC. Iraq's oil industry, however, has suffered as a result of a decade of war, internal political issues, inadequate investments, and low oil prices, all of which have put pressure on the country (Alzuwaini et al., 2019).

Impact of Iraq War and Oil on Iraq's Economy and Society

Expenditures on defence have risen considerably since 2003, when the United States invaded Iraq. Conquest of Mosul by ISIS terrorists in June 2014 has fueled military spending for the last 18 months, stretching the national budget to the point that expenditures in oil production are often not sufficient to assure maximum capacity in the sector (Heisner, 2017). As long as ISIS is in control of Ramadi and Mosul, Iraq's military spending will continue to put a burden on the country's budget in 2016, according to projections. Retaking Mosul might take months, but security troops have made significant progress against ISIS in Ramadi in recent weeks. An rise in Iraq's reliance on oil revenues has been hampered by falling oil prices and an increase in imports. From the end of 2013 to the middle of this year, the United States' foreign currency reserves have fallen from $78 billion to $59 billion. Additionally, the Iraqi dinar has witnessed severe devaluation across a broad variety of markets this year as well (RT, 2016).

Aside from that, low oil prices are devaluing the value of current exports, making it difficult for the government to realise more earnings. As reported by the government, the government earned approximately $300 million each day last year, or almost $300 million per day on average. It is currently just around $240 million each day, which is a significant decrease. Low oil prices will have a detrimental effect on Iraq's oil income in 2016, particularly as Iran prepares to start exporting its oil, which would further flood the markets (Alzuwaini et al., 2019).


With Iraq's capacity to increase oil production in recent years, even as oil prices have plummeted to six-year lows, the Organization of the Petroleum Exporting Countries (OPEC) has been able to increase its oil output. In 2014, the war-torn country produced an average of 3.2 mb/d of crude oil. Despite an ISIS invasion and a drop in oil prices, Iraq was able to continue continual gains in production, which reached a high of 4.1 million barrels per day in September, according to the International Energy Agency. Since 2014, OPEC's production has increased by an estimated 600,000 barrels per day, with Iraq contributing the vast majority of the gains, resulting in a total output of more than 31,5 mb/d, far outperforming the cartel's declared production target of 30 mb/d, according to the International Energy Agency (EIA, 2015).

OPEC's production objectives are not always met, despite the organization's best attempts to control output and maintain predetermined prices. A member country's inability to meet production objectives may have an impact on the price of oil. OPEC's output may be lowered as a result of unplanned disruptions as well. Oil prices are influenced by the extent of the interruption, the speed at which it happens, and the uncertainty of resuming production (EIA, 2021).


In spite of the fact that Iraq has resisted gravity thus far, the cracks in its oil-fueled success storey are beginning to surface. Due to late payments from the Kurdish Regional Government (KRG), London-based oil exploration firm Genel Energy has slashed its output projection for the year. Disputes over oil sales have been raging between the governments of Baghdad and Kurdistan for some time. During a meeting in December 2014, the two sides agreed on a deal in which the Iraqi government would take control of the KRG's oil exports in exchange for a share of the country's national income. While oil prices have fallen, the world's supply of natural resources has decreased. As a result, payments to the KRG have been delayed, and funds have been halted from being transferred to private oil companies in Kurdistan. As a result, Iraq's oil companies are suffering from a double whammy: low oil prices and late payments, respectively. In light of payment delays, Genel Energy now expects to generate between 85,000 and 90,000 bp/d less this year than it had anticipated (Park, 2014).

Iraq's Oil Reserves and Production

This is only a phase for the time being. Iraq's long-term oil production goals might be thwarted if factors such as falling oil prices, security concerns, and political upheaval (or any combination thereof) discourage investment. Iraq's possible influence on oil markets is causing special alarm in the industry. Iran, among many others, might have a detrimental effect on oil prices. A growing number of analysts are concerned that the projected 400 000 bp/d of increased production would worsen the oil market's already oversupplied state. The agreement between Iran and the P5+1 makes it more likely that production will rise in the first quarter of this year. It's plausible that Iraqi oil production is having a larger impact on oil prices than Iranian output at the moment. The second quarter of 2015 saw a significant rise in Iraqi oil output, prompting us to predict that Iraq will soon overtake Saudi Arabia as the primary contributor to OPEC's growth (OPEC, 2018). Iranian oil exports are not expected to reach their full potential until the production infrastructure is fully operational again.

Iraq's oil production is in jeopardy because of the region's well-armed extremist groups, who are operating with impunity and targeting Basra-area oil companies. Aside from Saudi Arabia's oil minister Ali al-Naimi and OPEC's second biggest producer Iraq, traders will be watching for indications of unrest that might have an impact on global crude markets in relation to shale oil producers and Chinese demand. Violence, kidnappings, robberies, extortion, and drug trafficking are all on the rise in Iraq's southern regions. Oil employees from the Az-Zubair field in Iraq were assassinated in November, along with an Italian, and 26 Qatari hunters were kidnapped in Muthanna province in December. Additionally, as state authority has decreased, tribes have stepped in to fill the hole, becoming increasingly engaged with justice and regional disputes as a result of their increased involvement in the administration of justice (Razoux, 2015).

Due to the current scenario, oil companies operating in and around Basra face an increased risk of being targeted by the region's well-armed extremist organisations, who are acting with impunity. Due to Iraq's dependence on oil exports, a prolonged suspension of operations would have a significant effect on the country's already fragile economy, as well as its efforts to resist ISIL in the north.

George W. Bush's regime-changing conflict in Iraq is commonly seen as an oil war – a scuffle for control of the world's second-largest proven petroleum reserves. Many people believed that this interpretation was reinforced when the United States pushed for and ultimately obtained, a UN resolution granting the US-British occupying power control over the spending of Iraq's oil profits. Without a doubt, the United States believes that international oil corporations will play a significant role in the growth of the Iraqi oil industry – a view that is shared by senior leaders in the Iraqi oil ministry as well. However, estimates about "controlling" Iraqi oil played strongly in the strategic, besides just economic, considerations of the Bush administration when deciding whether or not to invade the country. Washington hawks viewed an Iraq aligned with the United States as a viable option to Saudi Arabia as the United States' primary oil supply. Increased production in Iraq would also lead to decreased oil prices, which would put a financial strain on Saudi Arabia as well as other oil-producing nations in the Gulf, resulting in a political and financial upheaval in those governments. neo-conservatives and their friends who supported the war hoped that Iraqi oil would ultimately be used as a weapon for destabilising Arab governments and Iran, bringing "democracy" to the Middle East, or making the area safer for the United States and Israel. But Iraqi oil proved to be a failure (Alzuwaini et al., 2019).

Limits to Iraq's Sustainable Oil Production Capacity

The invasion of Iraq by the United States has the potential to alter the dynamics of the global oil market in significant ways. Given the importance of oil (and gas) to the political economy of Gulf nations, it is natural to conclude that changes in the oil market will have a significant impact on the political landscape in the area. There can be no doubt about that (Alzuwaini et al., 2019).

It is, however, difficult to predict the precise direction and timing of these transformational shifts. The recent experience reminds us not to overlook the ability of Gulf regimes to adapt to shifts in the oil market and the resulting dangers to the patronage politics that they have established for themselves. Unexpectedly resilient has been the cooperation amongst Gulf nations and other OPEC members in order to preserve high oil prices. If there was no adequate pre-war preparation for the "day after" in Iraq, and indeed the occupying troops were unable to restore state services or local security, it may put a crimp in the works of the neo-conservatives ambitious strategic ambitions throughout the Middle East and beyond. When it comes to determining the future of the world's oil markets, even while the United States' daring assault on OPEC may have achieved its stated goal, deeper historical patterns, such as Saudi Arabia's purposeful shift away from relying only on Washington, will play a role (Jones, 2012).

Following the Iraq war, the Gulf nations — notably Saudi Arabia and Iran — are confronted with a much more difficult task. Long-term oil markets will be destabilised as a result of the overthrow of Saddam Hussein's administration and the establishment of US authority over Iraqi resources. Much is dependent on what the United States decides to do with Iraq's oil industry. It is possible that ORHA may follow Saddam Hussein's lead in the early 1990s and keep Iraq's present oil assets in the control of the Iraqi National Oil Company while partnering with international oil firms to finance further development. A future Iraqi government would so have control over the timing of investment and output, much in the same way that other OPEC governments that have let international oil corporations into their nations have gained control over their own economies in the past. It is possible that a pro-US administration in Baghdad would be ready to accommodate Washington's goals and requirements over oil pricing, which would be consistent with a cooperative OPEC position. Iraq might revert to becoming an authoritarian rentier state as a consequence of the concentration of oil money in the hands of a new set of leaders as a result of this development (Bulloch and Morris, 2016).

Several real-world case studies back up this advice, which can be found in plenty in economic research on the necessity of economic diversity for healthy, robust, or sustainable growth. The World Bank describes it as follows: a nation that puts "all of its eggs in one basket" is at the mercy of external forces that are outside the control of the government, so diminishing "prospects for longer-term economic development (WTO, 2021)."

Iraq is a perfect illustration of the difficulties associated with a large reliance on a single industry - in this case, hydrocarbons. As a matter of fact, the Iraqi economy is among the most reliant on oil in the world. In 2020, the oil industry is expected to account for more than 90 per cent of government income, 96 per cent of export revenues, or 32 per cent of total gross domestic product. If not for the coronavirus epidemic that caused oil prices to plummet last year, these estimates would have been far higher. According to data from the World Bank, the oil industry contributed more than 43 per cent of GDP in 2019, and it contributed over 100 per cent of export revenues in 2018 (IMF, 2021). Consequently, understanding the significant influence of rising oil prices on the Iraqi economy is not difficult: when oil prices are high, the economy clearly gains, while the amount of money spent by the government grows. When prices plummet, the economy suffers, while government expenditure is substantially reduced, much like riders on a roller-coaster that they have no control over. When oil prices plummeted by 35 per cent in 2020, Iraq's GDP growth fell by about 16 percentage points, according to the World Bank's latest estimates. An economy in good health, on the other hand, needs steady growth rather than this kind of erratic growth, and a diversified economy is often more immune to price volatility in a single sector (IMF, 2021).

A work in progress, despite a mountain of facts and decades of expert counsel, economic diversification in Iraq's oil-rich region continues. The White Paper for Economic Reform, which will be released in 2020, provided some encouragement that the process could finally be gathering steam. Its primary goal is to "put the economy and government budget on a sustainable path, increase the private sector, and resuscitate the non-oil industries," according to the report. Cynics, on the other hand, would point to a well-known pattern among oil producers, in which major changes are proposed during times of economic hardship after a decrease in oil prices, only for such reforms to be placed on hold, restricted, or completely forgotten when oil prices rebound, as is the case with Venezuela (Nakhle, 2021).

Iraq cannot afford to slip into the same old trap it did in the past. With the energy transition and the global desire to end the use of fossil fuels, new and long-lasting structural circumstances are being created that every oil producer should take seriously. Without a doubt, the energy transition is a long-term process that might take decades to complete before it is completely realised. Oil producers, on the other hand, will be confronted with new and complex variables throughout this process. Global oil consumption will peak after which it will begin to (rapidly) fall, according to experts who are increasingly convinced that the world is nearing an inflexion point. When the oil market begins to stagnate — or perhaps decline — the rivalry among producers will become more intense as they battle to maintain their share of the market. In principle, low-cost manufacturers should be the last to quit the market if this scenario plays out as planned. Iraq, which has among of the world's lowest-cost known reserves, should be in a better position than many of its counterparts, especially those in the OPEC. When the harsh macroeconomic realities are taken into consideration, however, that advantage is diminished (Nakhle, 2021).

In order to satisfy their expenditure obligations and keep the public budget in balance, oil exporting countries must pay a price below which they can break even fiscally. Fiscal breakeven prices for most Middle Eastern oil producers, including Iraq, have been continuously higher than actual oil prices since 2016, according to the International Monetary Fund (IMF, 2021). As per the International Energy Agency (IEA), the breakeven price for oil in Iraq will be roughly $64 per barrel (/bbl) in 2020 (and $72 per barrel in 2021). To cover this year's budgetary needs, oil prices (Brent) are only predicted to be around $42/bbl in 2020. Even if the cost of producing a barrel of oil in Iraq is less than $11/bbl, Iraq would need far higher oil prices than the market would offer in order to balance its books (Kaufman et al., 2020). In the present economic environment, the country's ability to compete as a low-cost producer and to force other manufacturers to decrease their costs would be severely limited. On the other hand, by diversifying its economy away from its reliance on the oil sector, Iraq may reduce its budgetary break-even price dramatically. Because of its low-cost resources, the nation would be able to better use them.

According to the White Paper, a well-developed private sector is a critical pillar in the achievement of economic diversification and long-term development. The private sector, on the other hand, requires detailed laws and legislation, as well as fundamental services. Because Iraq's performance on public and political governance indicators has been so dismal, the path ahead is particularly difficult. For example, on Transparency International's Corruption Perceptions Index for 2020, the country was placed 160th out of 170 nations, barely ahead of countries such as Afghanistan or North Korea. Iraq was likewise listed as one of the least free economies in the world (ranked 148 out of 165) in the Fraser Institute's Economic Freedom of the World 2021 (Fraser Institute, 2020).

To find the benefits of engaging the private sector in a favourable way, Iraq just has to look to its own oil industry. Iraq has opened its doors for the first time since 2009 to private investment and international oil businesses, unlike most of its neighbours, including Saudi Arabia and Kuwait. A rise in Iraq's oil production that has outpaced the expansion of its competitors, notably those in the OPEC, is a major achievement. Since Iraq is the only Arab country to join the Extractive Industry Transparency Initiative (EITI), which is a world standard for good governance, transparent as well as responsible management of extractive resources despite its contributions being less than exceptional, another area that needs to be addressed in order to improve revenue management in the country (Lujala, 2018).

In this regard, Iraq has fallen short of many of its counterparts in that it has neglected to put some of its oil income into a national wealth fund. The irony is that Kuwait, it is neighbour and host country, has the world's oldest and second-largest sovereign wealth fund (after Norway's), while the United Arab Emirates has the world's third-largest SWF (after Norway's). There have been recent indications that the government is exploring the establishment of such a fund, which is encouraging news. It is believed that an SWF will assist in preventing the local economy from experiencing boom-bust cycles and transforming extracted resources into a portfolio of assets that will create sustainable income for future generations by investing part (or all) of the oil proceeds into the SWF. But even in the absence of an SWF, strong fiscal management is a necessary and sufficient precondition for efficient revenue management, even in the absence of a fund. Furthermore, the success or failure of the fund will be determined by the right design and administration of the fund (Nakhle, 2021).

It is past time for Saudi Arabia, the world's fifth-biggest oil producer and holder of the world's largest known oil reserves, to transform its oil wealth into strong economic growth and long-term development. Iraq has been a resource-rich yet economically impoverished country for a long time. The prospect of being both resource-rich and economically sound in the future, even as oil steadily loses its appeal in the rest of the globe, exist in Iraq should it successfully follow a healthy diversification plan, according to some analysts.

Iraq has been one of the world's most reliant nations on oil exports. Petroleum money has made up almost all of the country's exports, 85% of its budget, and 42% of its GDP during the previous decade alone. Macroeconomic instability is exacerbated by the country's heavy reliance on oil and the lack of budgetary capacity to implement counter-cyclical policies. At the start of January 2021, in a country of 40.2 million people, Iraq's rate of unemployment was almost 10 percentage points more than it was at the start of COVID-19. After-pandemic self-employment and informal employment continue to be major sources of unemployment for many people who have been forced to flee their homes and return (The World Bank, 2021).

The economy is gradually recovering from the twin oil and COVID-19 shocks of 2020. In the first half of 2021, GDP grew by 0.9 percent year-on-year (y/y). After lifting COVID-19 containment restrictions and increasing vaccination campaigns, the non-oil economy saw a surge of over 21% in the first half of the year (year on year). Early in the year, as Iraq adjusted to its OPEC+ quota, the country's oil sector saw a resurgence that outpaced the decline.

The price of oil exports has risen over the US$64/barrel mark, generating considerable revenue for the government. The 2021 budget law's tax and customs administration reforms resulted in a 53% increase in domestic revenue collection. Spending limitations allowed for a tiny fiscal surplus of 0.6% of GDP, turning the overall deficit into a moderate surplus. The central bank's reserves grew by 4.7 percent of GDP in the first quarter of the year because of the current account surplus (The World Bank, 2021).

Structural impediments in Iraq's economic recovery include public investment management limits that have harmed service delivery and arrears (particularly linked to public pay) that have not been cleared, as well as considerable exposure of the state-owned banks as well as the central bank to sovereign debt. Fragile political circumstances, a poor health care system, and endemic corruption are all contributing factors to the ongoing instability in the nation. OPEC+ output restrictions, which will be phased out by 2022, are expected to help the economy recover steadily. In the medium run, oil GDP will be the key engine of growth. The impact of the COVID-19 Delta version, along with water and energy shortages that affect agriculture and industry, is expected to keep non-oil GDP below 3% on average in 2021–2023. Because of this, the medium-term fiscal balance is expected to stay surplus, which will lead to the debt-to-GDP ratio progressively decreasing (The World Bank, 2021).

Up from 4.4 million b/d in 2017, Iraq's crude oil output has increased to an average of 4.5 million b/d through August of this year. Since declining in the late 1990s and early 2000s, Iraq's crude oil output has gradually increased, almost doubling in the last decade. In the OPEC, Iraq is second only to Saudi Arabia in crude oil production and has the fifth-largest proven crude oil reserves in the world. Iraq's onshore oil fields in the south of the nation, where almost all of the country's crude oil is produced, account for about 90 per cent of Iraq's total output (EIA, 2019).


Figure 1:

The Kurdistan Regional Government (KRG) is responsible for the remaining 10% of Iraq's crude oil output, which is sourced from oil resources in northern Iraq (KRG). Some output has been affected by disputes between Iraq's federal government and the KRG, although this has been alleviated by mid-2018. The consumption of petroleum and other liquids in Iraq has also increased steadily over the last decade, reaching 0.8 million barrels per day in 2017 (BPD). The majority of Iraq's petroleum and other liquids needs are fulfilled by local production, however, the government does import diesel, gasoline, and kerosene (EIA, 2019).


Figure 2:

More oil is produced in Iraq than it uses, and it sells the rest to other countries. In 2017, Iraq exported an average of 3.8 million barrels of crude oil per day (BPD) via sea, mostly from facilities in southern Iraq. Moreover, half of Iraq's seaborne exports are bound for Asian markets. 17 per cent of Iraq's total exports go to the United States. Small amounts of crude oil are also transferred to Turkey through trucks or pipelines. Revenues from crude oil exports are critical to Iraq's economy. A whopping 88% of all government income in 2017 came from crude oil exports, excluding those from the KRG (EIA, 2019).

There was an enormous impact on Iraq's government finances as oil prices dropped by 70% in April, their lowest point of the year. As a consequence of the drop in oil export receipts, the government's ability to cover basic expenses like as wages, pensions, and the running of government facilities declined by $4.1 billion in April. Even while revenues rose somewhat in May, they were still much below the amount needed to keep solvent at US$2.1 billion. In order to meet its monthly pay demand for May, the new government had to take $67 billion from its foreign reserves. In the latter days of September, Iraq's government account (which is separate from its foreign reserves) had just $300 million in it, according to one of the Prime Minister's aides (Mehdi, 2021). In the following months, there was little possibility of respite, unless prices climbed dramatically. A high-level "economic crisis committee" has been established for Iraq's incoming Prime Minister to assess the country's options for increasing revenue and decreasing expenditure in light of the present financial and economic predicament. Cutting state employee benefits, which would have the biggest immediate effect, has been a hot topic recently. Additional economic reform proposals might be offered to Iraq's parliament by September 2020, as mandated by the committee's mission. Iraq's economy is expected to suffer considerably this year because of the downturn in oil prices and the Covid-19 shutdowns. Private spending accounts for around 60% of GDP, and this share is projected to be severely impacted by the predicted decline in salaries and other forms of compensation. Government capital project delays or cancellations due to constrained funds will have an impact on the non-oil economy. Recent predictions from the World Bank and the International Monetary Fund indicate that Iraq's GDP would contract by 10% this year, and the country's current account is expected to show one of the largest deficits in history (Figure 3) (Mehdi, 2021).

Iraq’s fiscal deficit vs regional peers 

Figure 3: Iraq’s fiscal deficit vs regional peers 

Iraq's foreign reserve assets will face increased competition if the dinar is allowed to remain peg. Devaluing the Iraqi dinar is being considered by policymakers at such a point when the state's capacity to pay wages is already being placed into consideration. When it comes to financial and economic issues in Iraq, no one solution will be sufficient to close the gap between receipts and expenditures. As a result, the country would not be completely reliant only on borrowed funds to alleviate the strains, given the magnitude of the implied deficit at current oil prices. There has been a 30 percentage point drop in the price of Iraq's 2028 bond since January, and sources of discretionary funding will not be as numerous in a global economy dealing with a pandemic as they were in 2014. The government has borrowed $2.5 billion from local banks. This, on the other hand, is not a long-term solution, since it might lead to a decrease in borrowing from the private sector, further stifling economic growth in non-oil industries. After a late-June parliamentary vote, Iraq's parliament authorised the government to borrow US$18 billion: $5 billion for foreign borrowing, and US$13 billion from local banks (supported by Iraq's Central Bank) via the sale of treasury bonds to Iraqi banks. Iraq's liquidity problem has been brought to light by this strategy, despite the fact that it is an excellent short-term cure. It is possible to get a sense of Iraq's potential reaction to its present position by looking at how it responded throughout the last oil price cycle. When oil prices began to plummet in 2014, Iraq's capital investment was severely reduced (Hinrichsen, 2019). Even in 2019, when the national government's budget remained 20 per cent lower than in 2013, the effects of these changes were still being seen. Because of the lack of private sector engagement throughout the economy, the significant reduction in public expenditure had a negative impact on almost all of the country's critical services, as authorities delayed investments in the majority of sectors.

 Oil price and Iraq’s budget, 2009-2019

Figure 4: Oil price and Iraq’s budget, 2009-2019

The energy industry was not exempted from such cuts. The average yearly capital budget allotted to the Ministry of Oil (MoO) was one-fifth smaller in the 2015-18 period than it was in 2013, impairing Iraq's capacity to achieve its long-term oil and gas production goals. Ministry of Electricity budgets is dropped by more than 60% from 2013 levels, making the impact even more pronounced (Figure 5).

 Capital and current expenditure allocated to oil and electricity ministries (2012-19)

Figure 5: Capital and current expenditure allocated to oil and electricity ministries (2012-19)

Despite the recent decline in oil prices, early evidence suggests that the country's capital spending is already being affected by this. Due to the government's failure to enact a 2020 budget, expenditure is limited to a pro-rated 1/12 of the previous year's actual spending. There are also indications that the Ministry of Electricity has postponed all of its planned capital spending for this year. As a result of this, an anticipated 7,000 megawatts of planned generating capacity development would be placed at risk (transmission and distribution losses in the nation are among the largest in the world) (Tofigh and Abedian, 2016). A lack of funds will also make Iraq reconsider its ambitions to extract and utilise natural gas. One billion standard cubic feet per day (cf/d) of gas collection arrangements were signed by Iraq alone in the last year for the country's power facilities (Table 1).


It would have gone a long way to lowering how much natural gas is now being wasted by the country's oil sector if these projects had been implemented. However, whatever money that becomes available will very definitely be used to pay back petroleum (and related) expenses incurred by international oil corporations (IOCs), which take precedence over all other expenditures because of the instant profits they provide. Construction on two projects in Iraq with a combined capacity of 700 million scf/d, led by China Petroleum Engineering and Construction Corporation (CPECC) is being suspended due to lack of funds. In this new reality of lesser income, all Iraq's ambitions to collect underutilised natural gas and use it to generate power would face significant delays if creative investment deals with oil field operators are not reached (Jiyad, 2012).

People who work in Iraq's upstream saw the first signs of trouble back in March when the 100,000 BPD Gharraf field was shut down because the company that runs it asked its foreign workers to leave. The Missan oilfield (Buzurgan, Abu Ghirab) degassing units had to be upgraded by CNOOC Iraq after it had published a private tender in February. Iraq's southern oil-producing company, Basra Oil Company (BOC), was also affected. An emergency crisis cell was established in mid-March by Iraq's now-oil minister, former BOC CEO Ihsan Isael (now Iraq's Oil Minister) (Salameh, 2013). It was not just about operational difficulties, such as shift rotation or visas, but also about dealing with the IOCs, who account for the bulk of Iraq's oil output. The BOC sent a letter to all IOCs in late March asking for a 30% decrease in Work Programs and Budgets (WP&B) and a postponement of payments for the first and second quarters of 2020. As part of their Technical Service Agreements, International Oil Companies (IOCs) recuperate the expenses of production. Contractors were fired, drilling contracts cancelled, and supply chains reorganised to comply with the budget reform as a result of the IOCs' response (Aljamee, Naeem, and Bell, 2020).

Oilfield Services (OFS) equipment purchases by major IOCs like BP, Lukoil, and ExxonMobil have also been slashed by local contractors and multinational OFS companies. An estimated one-third of Iraq's Basra-based expatriate labour was slashed, and the country was forced to terminate many rig servicing contracts. Several weeks after BOC's original instruction to IOCs to slash spending, the problem's intractability was documented. It was recommended that IOC contractors not terminate contracts with local Iraqi contractor businesses because of the social ramifications of further exacerbating Basra's existing significant unemployment, which was one of the major drivers of Basra's protest in 2018. The BOC's budget took a blow as a result. It was one of a number of major projects that the state-owned company either cancelled or postponed (Iqbal and Ponsonby, 2015). Despite Petrofac's recent development of a new processing plant to accommodate a production rise from 240,000 barrels per day to 400,000 barrels per day by 2022, BOC's partners KBR and the Chinese business Anton (formed by ex-CNPC management) have postponed drilling programmes (Osseiran, 2018) (Figure 6)


These problems are compounded because of pre-existing issues such as reduced public investment (which would include drilling and well-workover programmes). In Iraq's move to secondary recovery and the rising importance of water injection wells in optimising reservoirs, proper management has become more expensive, and more complicated (particularly as focus shifts to the heavier Mishrif reservoir). Although BP has made modifications to the Qarmat Ali Water Treatment Facility, which can handle 3 million barrels of oil per day, Iraq's water demand is predicted to double over the next decade (although it is only injecting 1.4 million barrels at this time). For Rumaila Operating Organization (ROO), the Plateau Production Target asks for about 5 million b/d of water (PPT). West Qurna-2 is now relying on Dammam reservoir water to meet its long-term PPT, but this demand is predicted to treble in the future. According to a huge Chevron technical due diligence assessment conducted last year, this field's future water demands are estimated to triple from 200,000 barrels per day to around 800,000 barrels per day by the mid-late 2020s (Mahmood et al., 2017).

Artificial lift using electrical submersible pumps (ESPs) and the need for dependable power sources upstream.

More complex oilfield service supply chains: There is increasing demand to incorporate local OFS enterprises into current supply chains as a result of rising local content requirements. Procurement issues, such as equipment delays at ports, customs clearance, and a lack of specialised local enterprises, continue to hamper supply-chain management for IOC contractors like BP at Rumaila. There is still a long way to go for Iraq's OFS sector to meet international standards, despite its recent growth (Mehdi, 2021).

Growing need for export infrastructure upgrades: The financial effect of the crisis, as earlier mentioned, has affected federal budget allocations to the MoO, particularly for capital expenditures on mega-projects of infrastructure. It is imperative that BOC, ENI, and BP collaborate on the construction of two additional sea pipelines (pipelines 4 and 5) in order to increase pumping capacity at Fao. Also, the oil crisis has exposed the flaws in Iraq's petroleum contract paradigm, which is governed by the Technical Service Contract (TSC) model. Key to the current government's agenda is a promise to examine Iraq's TSCs with International Organizations (IOCs) (Mehdi, 2021). Negotiations with the IOCs are still going on, but there are a few important things to point out:

  • When oil prices are low like as they were in 2014-15, crises like this bring to light the rigidity of the TSCs and the resulting misalignment of interests. Quarterly production expenses are compensated and a taxable compensation charge is collected on additional output under the TSCs (i.e. production above pre-contract levels). Under $40-45/bbl, the TSCs are ineffective since the government's ability to collect costs is restricted and the taxable compensation charge is price insensitive.
  • All contracts in Iraq have previously been re-negotiated once before, thus no contract is safe from re-negotiation (Table 2). Upstream capital investment has been adversely affected in the past by oil price drops, leading to large budget changes (Figure 9).


It's still possible to re-negotiate, but the strategic agenda will be very different from what it was in 2013-14. IOC portfolios are changing and the cost of capital is rising; second, with increasingly complicated oilfield operations, the IOCs' Internal Rate of Return (IRR) and Net Present Value (NPV) sensitivities will be influenced by payment deferrals as well as demands to adjust field development budgets. For Iraq's Oil Ministry, cutting investments for 2020-21 means slower production growth (and lower associated gas utilisation) over the next five to six years, necessitating the renegotiation of existing TSCs so that IOCs are encouraged to make their own investments in return for better economic returns (Mehdi, 2021).


Electricity: Gas and Power

There are several problems plaguing Iraq's power grid. Despite the fact that its power generation fleet does have a nameplate capacity that should be sufficient to satisfy even summer peak demand, its actual capacity has been decreased by half as a result of subpar maintenance including the use of suboptimal fuels. Iraq is one of the worst countries in the world when it comes to the amount of power wasted in transmission and distribution. Since demand for energy has surpassed any capacity growth, outages have become a regular occurrence for the vast majority of families. This is mainly due to the high demand for cooling during the hot summers. The gap among peak demand with maximum grid supply of power has worsened during the previous five years, despite the fact that available supply has risen by one-third. After the previous drop in oil prices in 2014, budgets were tightened and only returned to pre-crisis levels in 2019, infrastructure investment, especially in distribution networks, has lagged behind what is needed. The capital budget has not been sufficiently supplemented by tariff collection. When income is lowered because of a negative feedback loop, less money is spent on capital projects, which in turn results in less opportunities to earn money in the future. Over the next decade, Iraq will need to spend between $5 billion and $7 billion a year on the rehabilitation of its energy sector, which has been reduced by oil prices and earnings. It is expected that roughly 7 GW of capacity development projects would either be postponed or altogether cancelled if the Ministry of Electricity follows the present working pattern. The Iraqi government now has to decide between not investing in the industry at all until oil prices rise again and revising its investment models in an attempt to entice private participation. At this point in time, the difference between supply and peak demand has expanded from 6,600 megawatts (MW) to 9,500 MW till July 2020, which would result in an increase in outages during the peak cooling season (Solangi et al., 2011).

The Prime Minister and the Minister of Finance head an economic crisis committee that is tasked with looking at the wider structural changes that may benefit the economy mostly in the medium and long term, in an attempt to make it much more resistant in the future. A significant economic reform programme (as claimed) that fails to solve this problem would be a huge financial burden on the government, given that power subsidies are a major part of the budget. The state spends over US$12 billion a year on electricity subsidies, which works out to around nine months of total earnings at the current level. When the country's fiscal health is as fragile as it is right now, this burden is amplified. Reforming this subsidy, in addition to lowering a huge burden on public finances, would have several additional advantages. In the first place, it will support a sector that has been bankrupt for a long time, allowing the government to put more money into the economy. It would also assist to convey a price signal that might slow down demand growth, which has been expanding at a 10% annual pace for the last several years already. There should not be a major rise in the cost of power for households as a result of the reform of subsidies. To supplement their grid-supplied energy during brownouts, the ordinary Baghdadi household now relies on private neighbourhood generators (Atansah et al., 20117).

Household utility expenses might rise to $330 per month as a result. Regulating the use of state-subsidized fuel by private generators might help to keep consumer costs down while shifting earnings from the private generators to the state utilities, thereby reducing the burden on consumers. Iraq's attempts to increase its natural gas production would likely be stifled by the country's constricted budgetary climate. Gas production is now at 32 billion cubic metres (bcm), with flares accounting for 16 bcm. Approximately 11 billion cubic metres (bcm) of the gas generated is linked to the country's southern oil resources. However, present market circumstances are unlikely to significantly alter the short-term outlook. As part of the OPEC+ agreement, Iraq is required to reduce oil production in the country's most important southern oilfields, and while this will have a corresponding impact on associated gas production levels, it has had no effect on the amount of marketed gas currently available because the reduced gas production has been deducted from the flared component. It should be noted, however, that extended oil output reductions might have an influence on gas production. For Iraq's natural gas output, the long-term effect will be more detrimental (Zhongming et al., 2021).

With a goal of increasing its gas-capture capacity by 1,000 million cubic feet per day (mscf/d), Iraq signed three agreements last year. It has already been postponed, according to the developer of the two projects on which a final investment decision had been taken, with combined capacity of 700 million cubic feet per day. Rawi Gas Hub, the third project, hasn't progressed beyond the MoU level and is unlikely to do so in the present climate. Due to Iraq's budgetary limits, any available cash will most likely be used to make payments to upstream oil companies, because Iraq's whole economy is dependent on the sector's sustained health. Delaying projects indefinitely, or exploring creative investment models that might attract private investment, will be the decision Iraqi authorities will face in the future. When it comes to the gas sector, this could mean finding ways to get the most out of the natural gas liquids that are mixed with the dry gas that is used for power generation. The amount of ethane cut from Basra is approximated to be about 16%, and it is either burned off or used in the natural gas stream for energy production; this could change (Naji et al., 2021).

According to an in-depth assessment issued by the IEA, Iraq, one of the world's largest energy producers, can handle its present electricity shortage and increasing power demands by urgent measures to alleviate system strain. There is a medium-term plan that makes the most of oil and natural gas resources or solar potential that are widespread in the nation. Iraq's oil output has virtually doubled in the last decade, despite the unprecedented difficulties of war in recent years. Despite this, the country's capacity to maintain and develop its electrical infrastructure has been hampered by the upheaval. Iraq's Energy Sector: A Roadmap to a Brighter Future, a new IEA research, lays forth immediate and medium-term solutions to Iraq's energy sector's most urgent issues (Zhongming and Wei, 2020).

According to a study, Iraq has a great capacity to improve its electrical network losses. Cutting these losses in half would have a significant impact on grid supply efficiency, allowing for a one-third increase in available capacity. Oil and gas exploration and production are also examined in depth in the study. With a rise in oil output of 1.3 million BPD by 2030, Iraq is on track to overtake Saudi Arabia as well as the United States as the world's third-largest producer of crude oil. More gas can be gathered and used inefficient power plants, according to the paper. Flaring now produces 16 billion cubic metres of gas each year, which is more than enough to replace Iraq's existing imports of natural gas (IEA, 2019).

"Iraq has done a wonderful job building its oil business under extraordinarily trying conditions," stated Dr Birol. By enhancing system maintenance, expanding energy output with bigger mobile generators, and incentivizing improvements to power plants as the heatwave approaches, we can solve today's pressing challenge." To the benefit of the whole Iraqi population, the IEA is glad to provide urgent recommendations for realistic changes and to propose a medium-term plan for a sustainable electricity system." By 2030, demand for power in Iraq is expected to double, resulting in a worsening of the country's current electrical shortage (IEA, 2019).

If no changes are made to the current structure of energy supply and the network, domestic, imported, and neighbourhood production will all need to quadruple by 2030. An energy source of more than 250 TWh would be required to do this. Investing in transmission and distribution to decrease network losses is one method to improve this outcome. Encouraging more efficient power consumption via progressive pricing and other measures are vital for limiting demand during the peak summer months of the year.

Taking use of the country's enormous renewable energy resources is also essential. According to the research, increasing the amount of solar PV and wind power in Iraq's energy supply to 30% by 2030 will help the country's electrical consumers as well as the environment. Encouraging the use of renewable energy and reducing network losses will allow for the export of 450 kb/d in oil and 9 billion cubic metres of gas by 2030 (IEA, 2019). Birol said that "in addition to its oil wealth, Iraq has some of the wealthiest solar and gas resources in the world." A more sustainable, dependable and economical energy future might be achieved if that potential was harnessed for its own economy and exported.

Iraq has had its share of ups and downs in the oil market and political turmoil during the last decade. Oil bidding rounds began in 2009 and has since experienced the oil price fall of 2014, a two-year fight against ISIS, mounting electrical shortages and security risks as well as interparty political disintegration and serious economic and budgetary limits, among other things. Amidst all of these obstacles, oil output has almost doubled in the previous decade. While it is true that this success has fueled the public sector's unsustainable expansion and its accompanying evils, it has done nothing to strengthen the Iraqi economy in the face of external market shocks. Iraq currently identifies itself in a negative cycle, as one remark has explained: reduced revenues lead to decreased capital expenditure, which in turn lowers available supply (especially of power) and revenues. Despite the fact that oil prices have risen since their April lows, the future course of pricing remains very unpredictable. OPEC+ reduction and worldwide government policies on lifting tight restrictions have contributed to this.

Additionally, guaranteeing compliance, designing field portfolio strategies focused on upstream project profitability, sustaining associated gas output, and retaining IOC trust are all issues that arise from the trade-off between higher pricing and reduced production. In May 2020, Iraq's new administration (which has been coping with a rising public health crisis) has concentrated on fiscal reform: reducing payroll budgets, streamlining bureaucracy, defining a fiscal framework around oil prices, and realising that oil income must be utilised for investment projects rather than pro-cyclical public expenditure. However, survival is not a plan, and the effects of this year's catastrophe will echo throughout the next decade. Slower output is inevitable as a result of this year's and next year's reduction in upstream spending. To the same extent, tariff reform in Iraq's energy industry has become an urgent requirement due to the unsustainable drag and disincentive provided by subsidies. For a long time, the production of natural gas, whether from associated or free gas sources, was seen as a supplementary need to that of oil. As demand for power rises and the potential for domestic sectors to benefit from a thriving natural gas economy expands, the traditional arithmetic that places gas second to oil is beginning to alter. If investment reform does not move the weight of capital allocation from the state to the private sector, Iraq's tremendous objectives may be scuppered by budgetary constraints.

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