Iraq’s Oil Surge Could Threaten the Saudis

Though there was no major dissension at OPEC’s Dec. 12 meeting in Vienna, there were signs that Saudi Arabia and Iraq are headed for a face-off over how much oil to pump. Before the start of the meeting, Abdul Kareem Al-Luaibi, Iraq’s oil minister, told reporters that his country plans to produce as much oil next year as it did when Saddam Hussein came to power more than three decades ago—a substantial increase over its 2012 output. Saudi Arabia, in contrast, has started to cut production to limit the risk of a price decline in 2013.


Iraq’s increased production, combined with the oil shale bonanza in the U.S. and higher output in Libya and Nigeria, is testing Saudi Arabia’s position as the swing producer—the country with enough spare capacity to tap in times of shortage and rich enough to withhold when the market is flooded. Iraq’s current daily production doesn’t yet threaten that role. But with Iraq publicly setting an optimal target of more than 6 million barrels a day, the Saudis may eventually find it hard to rein in their neighbor. “Saudi Arabia’s dilemma is that while it’s the key OPEC player willing to cut back oil production to sustain prices at desired levels, it’s also accommodating Iraq’s rising output and market share,” says Julius Walker, global energy markets strategist at UBS Securities (UBS) in New York. “Ultimately, there will need to be an agreement between the two as to how to balance these ambitions.”

Saudi Arabian Oil Minister Ali Al-Naimi needs to keep oil prices high enough to fund his country’s $600 billion social spending plans—accelerated by the Arab Spring—without incurring the wrath of consumers worldwide. Iraq, now the second-biggest supplier in OPEC, has a different priority: to rebuild its industry after decades of war.

With help from foreign oil companies, Iraq’s daily production surged 650,000 barrels this year to 3.35 million, the biggest annual gain in 14 years, according to data compiled by Bloomberg. The country plans to boost output to 3.7 million barrels a day in 2013 and at some point in the year match its 1979 record of 3.8 million. Libya, rebuilding its industry after last year’s uprising against Muammar Qaddafi, likewise plans to raise output next year, to 1.7 million barrels a day from 1.5 million now.

Brent crude recently traded as high as $110.15 a barrel, but it may sink to $88 by June if OPEC fails to curb supply, says Leo Drollas, chief economist at the Centre for Global Energy Studies. Though the Saudis have ample foreign currency reserves to cushion the country from a slide in prices, they cannot tolerate crude below about $90 a barrel for long, according to Jamie Webster, a consultant at PFC Energy.

Keeping prices reasonably high will become more challenging for the Saudis should Iran resolve its standoff with the international community over its nuclear research and start pumping oil at pre-crisis levels. Sanctions against Iran, once OPEC’s second-biggest producer, have reduced its exports by 50 percent, according to the International Energy Agency.

Demand for OPEC’s crude will shrink to 29.7 million barrels a day in 2013, the organization’s secretariat said in a statement at the end of its meeting in Vienna. That’s 1.1 million barrels a day below November’s actual output, OPEC data show. “OPEC is overproducing, and the Saudis need to cut,” says Roy Mason, founder of tanker tracker Oil Movements. The big question is how much longer the Saudis and their OPEC brethren are prepared to let Iraq go its own way. “It’s always been assumed that Saudi Arabia would accommodate the early phase of Iraq’s ramp-up,” says Greg Priddy, director of global oil at geopolitical consultant Eurasia Group. “But we’re approaching the point where Iraq is producing enough that that’s going to become uncomfortable.”