(CNN) -- The global oil market is on tenterhooks as a result of
the violent Sunni insurgency sweeping down from northern Iraq and threatening
Baghdad.
Iraq has the world's fourth-largest
oil reserves and the uncertainty has pushed the price of the global benchmark,
North Sea Brent, up 10% in the last two weeks to as high as $115 a barrel.
John Defterios
Oil has hit a nine-month high and is
close to what many would consider an economic danger zone. Another $10 spike
could undermine growth from the U.S. to China by pushing up the cost of
transportation and production.
There is no cohesive national
strategy that brings together Sunnis, Shiites and Kurds.
John Defterios
John Defterios
But the real acid test for the
market is unfolding now, as the ISIS militants enter Saddam Hussein's former
territorial stronghold around the Baiji refinery. And markets are pricing in a
potential supply risk -- including the possibility of a divided Iraq.
Baiji is a sprawling complex with a
refining capacity of 290 thousand barrels a day, according to the former head
of energy studies at OPEC Saadallah Al Fathi. The battle for Baiji, with
conflicting reports of who is in control, is indicative of what is wrong in
Iraq. There is no cohesive national strategy that brings together Sunnis,
Shiites and Kurds.
The national petroleum law has been
parked within Iraq's parliament for five years. The bill would finally
establish a revenue sharing agreement for national production from the Shiite
south to the Kurdish north, and eventually the under-explored south-western
corner of the country.
The government of Prime Minister
Nouri al Maliki, as U.S. Secretary of State John Kerry said in his bi-lateral
meeting Monday, has been unable to unite Iraqis. One could argue the country's
oil bounty has been a blockade in efforts to find a resolution.
Iraq has been a growing force in the
markets. The executive director of the International Energy Agency Maria van
der Hoeven recently described it as a country with the last of the "easy
oil." It is not difficult to find or to produce and it is plentiful, but
last week she noted its "expansion looks increasingly at risk," in
the IEA's Medium Term Oil Market Report.
The country sits on an estimated 143
billion barrels of proven reserves. Daily output hit a 35-year high of 3.6
million barrels day this year, placing Iraq right behind Saudi Arabia, within
OPEC.
Last year, Iraq's Deputy Prime
Minister for Energy Hussain Al-Shahristani told me of aspirations to hit 12
million barrels a day in the next decade, which would put it head-to-head with
Gulf heavyweight Saudi Arabia. The IEA is suggesting about half of that level
would be an ambitious target.
But the market is far more cautious,
and is pricing in a severe interruption to those production plans. There is,
indeed, a "new reality" on the ground, as Masoud Barzani, president
of the Kurdish Regional Government, told U.S. Secretary of State John Kerry
Tuesday.
Not knowing how the ISIS insurgency
will play out, or who will control refining capacity, could favor
Shiite-controlled facilities around Basra in the south and Kurdish-controlled
production blocks in the north.
A "who's who" of big oil
names -- Exxon Mobil, Shell, BP, Total, Lukoil of Russia and China National
Petroleum -- operate out of both areas. Further upset will send significant
ripples through the world markets.
Executives I have spoken to say they
have not yet suffered security breaches, but that they have set up private
forces to protect oil assets.
The executives speak of evacuation
plans that are in place, but at this stage do not believe they will be needed.
But, as Barzani has said, Iraq is in a new reality.
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