Tensions in Kurdistan and Implications for Oil Supply and the Global Economy

How the Kurdish Referendum Is Affecting the Oil Market

On September 25th, the Kurdish Regional Government or KRG held an Independence Referendum that was set to begin secession negotiations with the Iraqi government, creating a rift between the KRG and its neighbors and trading partners. Iraq is the second-largest producer of oil within OPEC, Organization of the Petroleum Exporting Countries, composed of 14 oil-rich nations throughout the Middle East, Africa and South America. Since the Kurdish Referendum, oil production in Iraq has decreased significantly, disrupting the oil market and the global economy. If the KRG and the Iraqi Government cannot resolve their diplomatic issues, oil prices will continue to rise as millions of barrels of oil remain out of circulation.

Understanding the Kurdish Referendum

There have long been tensions between the Kurds in the Northern region of Iraq and the Iraqi government. The semiautonomous KRG began openly criticizing the Iraqi Prime Minister Nouri al-Maliki back in 2014. In retaliation, the Iraqi Government cut off critical funds to the Kurds, further intensifying the regional dispute. The KRG announced its intention to hold an independence referendum in July 2014, but as the war against the self-proclaimed Islamic State intensified on the Syrian-Iraq border, the KRG decided to postpone the referendum.

That same year, Prime Minister Nouri al-Maliki was replaced by Haider al-Abadi, but the Kurdish people were still determined to claim independence. Once the city of Mosul was freed from the Islamic State in July 2017, the KRG went forward with the referendum. The Kurdish people voted overwhelmingly in favor of independence from Iraqi. According to CNN, 92% of the 3 million people that voted cast their ballot for independence, with turnout at roughly 80%.

Most of the international community disapproved of the referendum, including the U.S., Iran, and Turkey, stating that the cause would distract the region from the war against the Islamic State. According to Al Jazeera, Israel was the only country that supported the referendum, hoping that the country would dissolve into a series of tribal disputes. While the Iraqi government views the referendum as unconstitutional and the results as non-binding, the KRG made it clear that the results symbolize a clear intention to claim independence. On the path to statehood, the KRG was set to begin secession negotiations with the Iraqi government until tensions over the region’s oil supply halted the exchange.

How the Global Economy Is Responding

The dispute between the KRG and the Iraqi government has become more of an economic issue than a political one. Oil remains the main source of income for the country as a whole. Two of the largest oil reserves are located at the Bai Hassan and Avana oil fields in the dispute region around the city of Kirkuk. The city is ethnically mixed, with both the KRG and the Iraqi government claiming ownership of the area and its supply of oil.

Iraqi forces have surrounded the area, effectively taking control of all the oil reserves outside of the Kurdish region, forcing civilian workers and engineers to stay away from the fields. The Bai Hassan and Avana oil fields have been offline since October 19th, keeping 275,000 barrels per day in the ground, according to OilPrice.com. Iraq’s Oil Ministry has deployed more engineers to the region in order to get the oil fields up and running again, but progress has remained limited as the Iraqi government cannot keep the fields running without help from the Kurds. Both parties have a vested interest in resuming extraction and exporting oil reserves, but until the Kurds and the Iraqi Government can find a way to share in the profits, the oil fields will remain offline.

As penalty for the referendum, Iraqi Prime Minister Haider al-Abadi lobbied for Turkey and Iran, two of the nation’s largest trading partners, to cut off ties with the Kurds. Both nations were happy to oblige. As reported by CNBC, Turkish President Recep Tayyip Erdogan has threatened to shut down the Kirkuk-Ceyhan pipeline, the only viable oil export pathway from the Kurdish region to Turkey, one of the world’s largest importers of Iraqi oil. However, Erdogan is not likely to completely shut down the pipeline as it would further limit the amount of oil Iraq produces, thus raising the price of oil across the board.

Yet, tensions in Kurdistan have already sent ripples through the global economy. With two of the country’s main oil fields offline, the flow of oil through the Kirkuk-Ceyhan pipeline has slowed to just 196,000 bpd. Before the conflict, pipeline flow was at 600,000 bpd, according to OilPrice.com. This dramatic fall in oil production in the region has caused prices to soar. According to Bloomberg Markets, Brent crude, a benchmark used to establish the global price of oil, increased to just over $58 a barrel at the end of last week.

As Turkey continues to wield some control over the dispute, Russia has been quietly investing a great deal of money in Kurdistan. Unable to access or export much of its oil, the Kurdish economy is facing a series of obstacles. The KRG uses that money to pay for its infrastructure, as well as to pay for much-needed resources it gets from neighboring Iran and Turkey, including food and other consumer goods. Until a resolution is reached, Russia has stepped in to fill this void. The Russian oil powerbroker Rosneft has invested as much as $4 billion in the Kurdish region over the last year, as reported by CNBC. Taking resources away from Kurds now means going up against powerful Russian interests.

Bloomberg Markets also reports that the KRG has also entered a series of repayment deals with some of the industry’s biggest traders, offering future oil shipments in exchange for loans to keep its economy alive. Multiple traders and investment firms want to see the Kurds reclaim their oil wealth so that the KRG can repay its debts on time.


Forging Ahead with a Diplomatic Resolution

As the dispute over the Bai Hassan and Avana oil fields rages on, violence and bloodshed has erupted on the Kurdish-Iraq border. Desperate to get its economy moving again, the KRG recently announced a ceasefire with the Iraqi Government as well as a freeze on its referendum results. This was a telling sign that the KRG is ready to negotiate with the Iraqi government in exchange for possibly nullifying the results of the referendum, much to the chagrin of the Kurdish people. The KRG released the statement, “As Iraq and Kurdistan are faced with grave and dangerous circumstances, we are all obliged to act responsibly in order to prevent further violence and clashes between Iraqi and Peshmerga forces.”

While a resolution is far from assured, all parties seem bent on resuming the flow of oil as quickly as possible, as long as both the Iraqi government and the Kurdish people are allowed to reap a share of the profits. According to OilPrice.com, both governments have agreed to cooperate in bringing the oil fields back online, but the terms of the arrangement have yet to be finalized.

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