Explainer: Iraq’s open rebellion will create chaos in the oil market, crude oil will be sold at throwaway prices!

After UAE, now Iraq is also talking about exiting OPEC. Iraq has demanded from the oil cartel that if its production quota is not increased then it will be expelled from this organization. Well, there has been a lot of discussion about this news in the whole world for the last few hours.

In such a situation, the question arises that if Iraq goes out of OPEC, how will the international crude oil market change? If Iraq starts producing 7 million barrels per day instead of 4 million barrels per day, then what will be the price of crude oil?

The special thing is that this rebellion in Iraq is not going to be a common one. If OPEC does not accept Iraq’s demand, then crude oil prices will fall to a level that OPEC members would not have even thought about. According to experts, if Iraq starts production on its own and the supply of Iraqi oil increases, then the price of crude oil may come between 50 to 55 dollars.

This means that from the current level the price of crude oil can fall by about 20 dollars i.e. 25 to 30 percent. Let us try to understand in detail how the equations of the crude oil market will change after Iraq becoming OPEC free.

Why does Iraq want exit from OPEC?

Although Baghdad has no immediate plans to leave the organization, Oil Ministry spokesman Salim al-Riqbi told Bloomberg that Iraq believes OPEC should increase its production limits according to the country’s production capacity and economic needs. Al-Riqbi said the organization should increase Iraq’s production capacity. Otherwise, it will have to be decided whether to remain in OPEC or exit it.

OPEC controls oil production among its members by setting overall production targets and giving specific production quotas to each member country. These quotas are adjusted based on global demand and market conditions. According to reports, Iraq is troubled by these quotas.

According to Bloomberg’s report, this warning comes amid growing tension within OPEC+ over production targets and it comes after the UAE separated from OPEC earlier this year so that it could pursue a more independent production strategy.

News agency Reuters has reported that Iraqi officials may privately consider the possibility of leaving the group if the production quota given to Baghdad is not significantly increased. A senior official at Iraq’s oil ministry told the agency that Iraq’s concerns should be taken “with utmost seriousness.”

The official told Reuters that Saudi Arabia and other OPEC allies should take the matter very seriously. Failing this, Iraq will be forced to consider all available options. However, he stressed that exit is still only in the realm of consideration and not a fixed policy. He further said that it would be too early for this step.

Iraq, OPEC’s second-largest producer (producing 4 million barrels per day) and one of the organization’s five founding members, has long argued that current production limits do not reflect its production capacity.

Since the formation of OPEC+ in 2016, the country has often demanded higher quotas. It says it needs more income from oil to rebuild its economy devastated by decades of conflict and sanctions. Apart from this, an official of Iraq’s Oil Ministry told Reuters that the country is facing a serious economic crisis due to the US-Iran War and to deal with this situation it needs more oil quota.

This latest dispute has come to light at a time when OPEC and its allies are negotiating the production baseline for next year. Bloomberg said that expressing its desire to leave the group could be part of Baghdad’s effort to achieve more profitable quotas during negotiations.

Reuters reported in May that the group had agreed to increase the oil production target to 1,88,000 barrels per day to make up for the shortfall caused by the UAE’s withdrawal. But it is clear that this was not enough to meet the needs of Baghdad.

Why does Iraq want to increase production?

This dispute is similar to the case of UAE, which separated from OPEC due to disagreement over production quota. The UAE’s main complaint before leaving OPEC in April was that its production quota was not according to its actual capacity. Abu Dhabi had invested heavily in increasing oil production and its argument was that due to OPEC restrictions it was not able to fully utilize its capacity. UAE officials also wanted more flexibility to monetize their reserves so they could take advantage before the global energy transition reduces long-term demand for oil.

Iraq is also now giving similar argument and saying that its quota should be according to its production capacity and economic needs. Iraqi officials have repeatedly said that the country needs more oil revenues to rebuild its economy and development work after decades of war, sanctions, instability and damage caused by the US-Iran war, which can only be achieved by increasing oil production.

According to Reuters report, Iraq is trying to regain its full export potential after the disruptions caused by the US-Iran war and the temporary impact on shipping through the strait. Government spokesman Haider al-Aboodi said Iraq aims to increase oil production to 7 million barrels per day in the coming years.

Al-Aboodi told Reuters that Iraq is working to regain its full oil export potential and aims to increase oil production to 7 million barrels per day in the coming years.

What impact will Iraq’s exit have on OPEC?

Despite the warning, Iraqi officials have again said that the country remains with OPEC for now and will continue to work within the organization’s rules, while also trying to get more production quotas. Still, if the worst happens and Iraq pulls out, it would be a major blow to OPEC.

In recent years, OPEC’s influence on the global oil market has weakened. The reasons for this are – increasing production of US shale operators (due to increase in shale oil extraction, US has become the world’s largest oil producer) and other non-OPEC producers, the recent Iran dispute and UAE’s exit from the cartel.

OPEC’s influence comes from the fact that it can influence global oil prices by coordinating production levels among its member countries. By collectively increasing or decreasing production, this group can influence the balance between supply and demand in the global energy market.

However, this effect weakens when member countries deviate from OPEC quotas to produce oil independently or leave the organization altogether, reducing the group’s ability to control total supply.

The possibility of Iraq following the path of UAE has arisen at a time when oil prices, which had increased due to the Iran War, have mostly come down. This shows how eager producers are to restart production in an already well-supplied market. Analysts warn that further divisions within OPEC may increase the risk of price wars in the future.

Iraq’s exit would have particular symbolic significance because Iraq was one of the five founding members of OPEC when the organization was established in Baghdad in 1960. As Iraq is the group’s second-largest oil producer, its exit would also reduce OPEC’s share in global oil production and further weaken the group’s influence on the global energy market.

How much oil reserve does Iraq have?

1. Iraq has proven reserves of approximately 145 billion barrels of crude oil, which is the fifth largest in the world and about 8 percent of global total reserves. Iraq is next after Venezuela, Saudi Arabia, Iran and Canada.
2. This vital supply accounts for more than 90 percent of the Iraqi government’s export earnings, whose main oil fields are concentrated in the southern Basra region.
3. About 70% – 80% of the reserves are located in the vast oil fields of southern Iraq, while 20% are in the north near Kirkuk and Mosul.
4. At current production levels, Iraq’s reserves could last for approximately 90 to 375 years, depending on oil extraction and consumption figures.
5. Iraq is the second largest producer of crude oil in OPEC, producing about 4 million barrels per day.

So will crude oil come at $50?

If Iraq exits OPEC, its impact will be visible not only on OPEC but on the entire oil market. Ajay Kedia, director of Kedia Advisory, says that if Iraq produces oil independently and in some time its production reaches the level of 7 million per barrel, then the prices of crude oil will be seen falling.

He said that many countries still have to fill their oil reserves, which were emptied during the war. Even while filling this reserve, there may be a decline of 20 dollars per barrel i.e. 25 to 30 percent in the prices of crude oil from the current level. This means that crude oil prices can fall between 50 to 55 dollars per barrel. When the oil reserves of China, America and other countries are replenished, the prices of crude oil may fall further.

Current crude oil prices

If we talk about crude oil prices, they have come down considerably. Look at the figures, currently the crude oil of Gulf countries was trading at $ 75 per barrel with an increase of about one and a half percent. Whereas in the morning it was trading below $73 per barrel. Which was the pre-war level. On the other hand, the price of American crude is trading at $ 72 per barrel with an increase of about two percent. Whereas in the morning American crude oil had fallen below 70 dollars. According to experts, fluctuations in crude oil prices may continue in the coming days.