For many countries, the current depression in oil prices has sparked a new era of impending economic implosion. Yet no one seems to suffer as much as Iraq today – a country without an appropriate government, blocked by its struggle against ISIS and torn apart by internal conflicts. With a median age of 21, the challenge for Iraq as a federal state within its current borders is compounded by the fact that the government has little to offer many groups. young people, tired of patronage and paperwork. Iraq could mitigate the risk by distributing money – it does not have it, it could draw on its reserves – again, very little (about $ 62 billion), Baghdad’s only survival strategy is to wait and pray for better times.
Just as Iraq hoped to rebuild the country – its 2020 budget was the largest in history and focused on renovating the country’s dilapidated infrastructure – external developments put an end to ambitious goals. The massive budget was in many ways a response to the 2019 protests that did not subside in 2020 – in the end, they led to the dismissal of the government led by Abdul Mahdi (who continued as a caretaker until ‘on 02 March after the appointment of Parliament). the successor candidate, Mohammed Tawfiq Allawi, who was trained in the United States, failed to obtain sufficient parliamentary approvals). The new candidate for prime minister, Adnan al-Zurfi, could face a similar future, since the integration of Sunnis and Kurds will inevitably be a major challenge.
Chart 1. Official Iraqi selling prices to Europe compared to the Oman / Dubai average in 2018-2020 (USD per barrel).
Source: Thomson Reuters.
After Saudi Arabia lowered its official selling prices in April, for many, the key question was whether Iraq and Kuwait, the oil exporters who routinely rely on the price signals provided by Saudi Aramco, would follow suit and adopt price reductions in gross differentials. The two did, aware of the inherent risks of not doing so, but reluctantly, because it was a price drop that was deeply ingrained in the flesh of government. Iraq lowered its OSP Basrah Light to Asia to $ -3.2 per barrel discount against Oman / Dubai, the lowest in years, while the April European price fell 5 $ per barrel to -8.8 $ per barrel against the dated. With Brent prices around $ 20 a barrel, the prospect of selling Basrah Light in Europe for around $ 10 a barrel is really daunting (given the oil price at breakeven, around $ 60 a barrel). Related: $ 1 oil: Saudi Arabia’s attempt to crush American shale
Chart 2. Official Iraqi selling prices for Europe vs Brent dated 2018-2020 (USD per barrel).
Source: Thomson Reuters.
While in theory it remains true that Iraq could partially compensate for all the losses suffered by the ongoing price war by increasing production levels, but even with OPEC + production quotas, it has more or less produced as much as he wished (in fact, Iraq was one of the most blatant transgressors of exit plugs). In addition, the drop in oil prices is simply too great for the Iraqi economy to swallow – the proposed 2020 budget was estimated at around $ 135 billion, with 93% of government revenue from oil exports. . The assumed average annual price of oil was $ 56 a barrel in 2019. If the differential cuts initiated by Saudi Arabia became a mainstay, Iraq should now only collect 30% of what it originally planned for. this year. In such a case, it could burn all of its reserves totaling some $ 62 billion by the end of 2020, leaving it dependent on another IMF package.
Chart 3. Oil prices at Iraq’s balanced budget in 2005-2020 (USD per barrel).
Source: IMF, data from the author. Related: Oil Drops To $ 20 On Largest Crude Construction Since 2016
Added to this multitude of problems is the rapid spread of coronaviruses. As of April 1, Iraq had just over 720 confirmed cases, with some 180 cases recovered and 52 deaths. The 7 million state employees remain a burden on the federal government, however, life in Iraq is paralyzed and private companies are on the brink. Southern Iraq experienced its first crown case relatively late (09 March) – if the pandemic spreads around Basra, it could even jeopardize oil production as supplies to project sites would become much more difficult. The threat of the coronavirus could curb the rise of military antagonism, against the backdrop of rumors circulating in Iraq that the United States wishes to increase the number of American troops in Iraq, in a manner not too different from what is happened to ubiquitous manifestations. .
The emergence and rapid spread of COVID-19 has allayed popular anger – mainly due to people’s fear of contracting a highly contagious virus during a demonstration – but has not alleviated the complexity of all the tasks involved. solve. The Iraqi government posts monthly deficits reaching $ 2 billion and with very little of the country’s crucial industrial production in the hands of individuals, it is not surprising that the federal authorities can collect only less than $ 50 million in donations to control the spread of the coronavirus. Iraq has closed its borders and the government has put in place a 24-hour curfew, strictly enforced by the police, greatly limiting the last lifeline for city dwellers – informal trade.
All this also complicates Baghdad’s relations with the Kurdish administration. As part of the November 2019 agreement, the Kurdish Regional Government (KRG) has committed to supply the federal oil trader SOMO with 250 kbpd of crude oil in exchange for a 12.6% share of the Iraqi budget – as this is often the case with the Iraqi pacts, it never happened. . The KRG said it would wait until an appropriate government was formed in Baghdad and from there begin to comply with the agreement – a smart tactical decision, looking back at how Tawfiq Allawi failed to consolidate the political allies around his candidacy. A dead end in a way is the end result – Baghdad does not want to push too hard not to compromise its exports from Kirkuk which pass through the territory of the KRG, while Erbil is finally waiting to obtain a counterpart who would hold at least some internal power.
By Viktor Katona for Oilprice.com
More readings from Oilprice.com: