The coming danger: When Iraqi oil becomes a wealth without outlet

The coming danger: When Iraqi oil becomes a wealth without outlet

9-28-2026

Researcher Shatha Khalil
The danger of the economic crisis facing Iraq today lies not only in the decline in oil revenues, nor in the rise of the dollar’s price on the parallel market, nor even in the projected sharp economic contraction in 2026. The greater danger lies in the simultaneous activation of a set of weaknesses that have accumulated over decades: an economy heavily dependent on oil, a budget burdened by current expenditures, a limited non-oil production base, extensive reliance on imports, and export outlets that remain insufficiently diversified to allow the economy to absorb a major geopolitical shock. Therefore, the question that should concern Iraqi policymakers is no longer: What happens if the price of oil falls? It has become far more complex and dangerous: What happens if oil remains available, and global demand for it persists, but Iraq is unable to export sufficient quantities at the usual cost and speed? The regional crisis and the disruption of navigation through the Strait of Hormuz have revealed that the security of the Iraqi economy depends not only on the size of its oil reserves or the level of global prices, but also on the entire chain that transforms a barrel of oil from an underground resource into dollars entering the treasury. Any bottleneck in this chain quickly moves from the oil sector to the budget, then to government investment, liquidity, markets, the exchange rate, and the citizen’s standard of living.

The figures available in September 2026 lend even greater weight to this warning. The European Bank for Reconstruction and Development (EBRD) projected that the Iraqi economy would contract by about 12% in 2026, attributing this primarily to regional instability and disruptions to oil exports. Meanwhile, World Bank data indicates that in 2025, oil accounted for approximately 88% of government revenue and 91% of merchandise exports. These figures reveal the nature of the problem: when oil production is disrupted, not only does one sector of the economy decline, but the primary source of state funding and foreign currency also comes under pressure. However, it would be a mistake to jump from these indicators to talk of imminent collapse. Iraq still possesses substantial international reserves, estimated by the World Bank at around $98.7 billion in February 2026, which represent an important line of defense against shocks. But reserves, however large, are not a permanent source of revenue and should not be treated as a substitute for continuous oil flows. Reserves provide the state with time to manage the crisis and readjust its priorities. But if it becomes a tool for financing a long-term structural imbalance, the question gradually shifts from the size of the reserve to the rate at which it is depleted. This is precisely where the next danger begins.

The situation is further complicated by the nature of Iraqi public spending. The state bears a large burden of salaries, pensions, transfers, and operating expenses—obligations that are difficult to reduce quickly without significant social and economic repercussions. This creates a serious fiscal paradox: the state’s main revenue is volatile and susceptible to external shocks, while a large portion of its spending is fixed or nearly so. In normal times, high oil revenues can mask this problem, but shocks quickly expose it. If exports remain below normal levels for an extended period, the options become increasingly difficult: increased borrowing, postponement of investment projects, use of a larger share of reserves, seeking additional revenue streams, or restructuring spending. Each option carries a cost. Postponing investment, for example, might seem less painful than cutting salaries, but in practice, it weakens infrastructure, job creation, and future growth. In other words, addressing the current crisis could come at the expense of the economy’s ability to grow in the future.

The second danger is the spillover of the crisis from public finances into the lives of ordinary citizens. Iraq is a heavily import-dependent economy, and therefore, disruptions to trade routes, increased transportation and insurance costs, and the widening gap between the official and parallel market exchange rates can manifest in the prices of food, medicine, and consumer goods. It is crucial to understand that inflation is not merely an economic metric; it is a mechanism for the harsh redistribution of income, as rising prices place a disproportionate burden on those with fixed salaries and low-income families. When wages remain stagnant while the costs of goods, housing, transportation, and services rise, purchasing power declines, even if salaries continue to be paid on time. Therefore, the true measure of resilience should not be solely the state’s ability to pay salaries, but rather its capacity to maintain the real value of those salaries and the stability of essential markets.

The third, and perhaps most strategic, risk is what the export route crisis has revealed. For decades, Iraqi economic discourse has focused on the need to diversify income sources away from oil—a valid objective. However, the current crisis has added another equally important necessity: diversifying the routes for exporting oil itself. An economy dependent on oil and lacking a sufficient network of alternative routes remains vulnerable to what can be termed “single-corridor risks.” Baghdad has already begun attempts to increase the use of the northern route towards the Turkish port of Ceyhan and to transport quantities of southern oil northward. However, current alternative energy sources are still far from compensating for the loss of southern export capacity. What is needed is not a temporary solution using trucks, but rather a long-term economic security strategy that includes developing pipelines, increasing storage flexibility, diversifying export outlets, and improving logistical infrastructure, so that a crisis in a single maritime corridor does not become a crisis in the finances of an entire nation.

What needs to be done now requires separating crisis management from economic reform. Crisis management begins with protecting foreign reserves, controlling non-essential spending, ensuring funding for food, medicine, essential services, and salaries, preventing uncontrolled currency speculation, securing strategic stockpiles, and expediting alternative oil export options. Clear financial scenarios should also be developed based on the duration of the crisis, not on the assumption that it will end soon: What will the country do if it continues for another three months? What if it continues for six months? What expenditures will be protected, what can be postponed, and what is the acceptable borrowing limit? Managing the economy in a time of uncertainty requires multiple plans, not a budget based on a single optimistic scenario.

True reform begins when Iraq recognizes that economic diversification is no longer an optional development project, but a matter of economic security. Agriculture is not merely a food-producing sector, industry is not simply a means of increasing GDP, and the private sector is not merely a complement to the state; all are lines of defense when oil prices are shaken. Every dollar generated from non-oil exports, every essential commodity that can be efficiently produced domestically, and every job created by the private sector outside the government budget gradually reduces Iraq’s vulnerability to oil shocks. But this requires a stable business environment, a banking system more capable of financing investment, reform of public institutions, and directing spending toward infrastructure and production rather than expanding current obligations disproportionately to non-oil revenues.

Will Iraq withstand the shock? The available resources suggest it has a significant capacity to absorb the impact, but the more pertinent question is: at what cost, and for how long? Economic resilience doesn’t simply mean the state can use reserves and pay salaries for a few more months; true resilience means absorbing the shock without depleting future resources or pushing the economy into a cycle of deficits, borrowing, inflation, and declining investment. If shipping improves and exports return to normal levels, the economy could experience a strong rebound, which explains the European Bank for Reconstruction and Development’s forecast of growth of around 14% in 2027 after the sharp contraction expected in 2026. However, this rebound, if it materializes, should not be interpreted as the end of the problem, because the current crisis has exposed a flaw that will persist even after the shock subsides.

The most dangerous decision that could be made after the crisis ends is to revert to the status quo ante. Future oil price increases may restore revenues, replenish the treasury, and alleviate pressure on the dinar, but they will not eliminate the vulnerability exposed by the 2026 crisis. Iraq possesses one of the world’s most important oil reserves, but it now needs to transform this wealth from a source of dependency into a foundation for building a more resilient economy. The message of the crisis is clear: the danger is not that Iraqi oil will run out, but that an entire nation will remain heavily dependent on a resource whose access to the market could be disrupted by a crisis originating outside its borders. Therefore, the coming years should not be years of waiting for stability to return, but years of building alternatives. Crises do not become disasters when they begin; they become so when they expose vulnerabilities and then end without any real change.

Economic Studies Unit / North America Office,
Links Center for Research and Strategic Studies

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