Commodities | May 25 2010
By Greg Peel
News footage of bombings in Iraq have become so commonplace the average punter is now desensitised and ambivalent. Scepticism remains over the possibility of a coalition government being successfully formed in Iraq, over the potential of any sort of democracy being achieved, and over what sort of nation might emerge were the US to finally pull out its troops as Obama has flagged.
The average punter is also convinced the younger Bush government's invasion of Iraq was all about securing access to Iraqi oil and little about the Al Qaeda and WMD smokescreens put up as justification. The war has now moved into its seventh year, and this month marked the seventh anniversary of Bush's “mission accomplished” speech. It is with no good reason that global attention long ago moved away from any concept of Iraqi oil production returning to its glory days.
Iraq boasts the world's second largest known oil reserves, behind Saudi Arabia, so any return to former production levels would have a decided impact on the global oil price. But right now the world's focus is on the Gulf oil spill, the European crisis and a slowing Chinese economy. There is little thought given to Iraq.
But London-based oil analysts with RBS note that Iraqi oil should be ignored at the oil trader's peril. They suggest “monumental” events for the world's oil industry are currently unfolding in Iraq.
Despite a new government not yet being formed, momentum is building at Iraqi oil projects, RBS notes. Three of the biggest projects are targeting early production increases faster than expected, and the Oil Ministry expects 600,000 barrels per day of incremental production by the end of 2012.
RBS suggests Iraq will now be focusing on rebuilding infrastructure.
There is an argument to suggest Iraqi oil reserves are overstated, but RBS rejects this view on the basis of unreliable data. Evidence from last year's auctions, for which production targets were met, does not support such a view. But production growth will nevertheless be modest from here until 2013 compared with global supply, meaning the oil price and oil producer share prices still have room to rise over that period in the analysts' opinion.
But once progress has become apparent in the plan for a fivefold increase in Iraqi oil production, to 12 million barrels per day by 2017, then the world will start to take notice, RBS suggests.
In the interim, a resolution to the Gulf spill and the formation of a coalition government in Iraq at some time ahead could encourage a greater focus. The turning point, says RBS, is when those oil companies involved in Iraq start including Iraqi output in production forecasts.
Clearly, any return to previous production levels from the world's second largest oil reserves will only prove a drag on oil prices in the decade ahead.