“What happens in Iraq stays in Iraq,” is not a fitting catchphrase for recent events.
In oil markets, the long-term consequences of Iraq’s out-of-control, geosectarian conflict will be felt far beyond its fragile borders. Already, one secret is on the verge of going viral: Canada is an increasingly attractive place to invest in a globally deteriorating, insecure oil and gas landscape.
Oil prices have already reacted to Iraq’s insurgency from the north. The threat of disruption to some or all of Iraq’s 2.5 million a day of oil exports is real. International barrel prices have risen by 6 per cent over the past two weeks as traders scratch the back of their necks and ask buyers for another $6 (U.S.) a barrel to reflect the uncertainty.
Concerns about oil supply loss are valid. Our feature chart shows Iraq’s output over the past half century. The oil-soaked country is a case study in punctuated disruption from wars, notably 1979, 1991 and to a lesser extent 2003. Another crimp in Iraq’s output could be longer lasting, much more like what has gone on in Libya or Venezuela, both of which have rickety production records.
Iraq’s troubles are not isolated. Many oil exporters, large and small, are now experiencing civil war, Western sanctions, insidious corruption or all of the above. Unrest due to religious and cultural fundamentalism is haunting a huge swath of geography, much of it above a large fraction of the world’s otherwise easily accessible oil reserves. From the Middle East to North Africa, and now even oil-bearing sub-Saharan African countries like Nigeria and Kenya, the social disorder is increasing.
While a rising oil price is the first artifact of the messiness, the spillover effect to those with dollars to invest is a rapidly escalating risk premium. Put another way, the incentive for free-market institutions and companies to invest in oil plays abroad is declining.
In the first quarter of 2014, the seven largest independent oil companies (IOCs) announced $17-billion in cutbacks to their annual capital expenditures. The end of the second quarter is nigh, and publicly disclosed management discussions are unlikely to bring any change to the numbers or the dialogue. In fact, further retrenchment from investing in the international oil scene is likely. Investors, lenders and corporate decision makers want to be able to invest in stable growth, and sleep at night knowing their investment isn’t going to be lost to war, expropriation or other nastiness.
All this runs counter to past market mechanics. Higher oil prices have historically led to rising capital expenditures sprinkled all around the world. The Iraqi situation is going to catalyze lower global capital expenditures on oil projects, with concentrated, greater investment focused on more stable growth regions like the United States and Canada. So, what happens in Iraq stays in North America.
Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.