Iraq Challenges Saudi Arabia, Resists Oil Production Cut

The kingdom tries to put the squeeze on an Iraq that is emboldened by rising oil output.

In defiance of OPEC heavyweight Saudi Arabia, Iraq signaled on Wednesday during a meeting of the cartel that it would not participate in an oil production cut if it is deemed necessary to keep prices stable.

“Iraq will never cut production,” said Falah Alamri, Iraq’s representative to the Organization of the Petroleum Exporting Countries. “Some countries that have increased their production in the last two years, they should do so.”

That was a clear reference to Saudi Arabia which this summer lifted its output to above ten million barrels of crude per day, a thirty-year high, to prevent prices from rising as Western sanctions halved Iran’s oil production.

Iraq has since overtaken Iran as the second largest oil producer in the cartel but is still exempt from its quota. After twenty years of sanctions and war, Iraq’s recovering oil industry may hold the key to keeping the country from fracturing between its Shia, Sunni and Kurdish populations, even if the latter have started exporting oil independently over the central government’s objections. A military standoff in the north of the country, where Baghdad deployed forces last month in what is described as a necessary measure to address the deteriorating security situation there, remains unresolved. The Kurds moved paramilitary troops of their own into the area, interpreting the central government’s behavior as a challenge to their autonomy.

Saudia Arabia, which needs crude to trade at over $90 per barrel to balance its state budget, could exacerbate the situation if it pushes Iraq to cut oil production.

Although the OPEC members agreed this week to keep output at thirty million barrels per day, analysts expect that production will have to be restrained in the near future if the petroleum exporting countries are to prevent lackluster economic growth in Europe as well as rising oil production in North America from sending prices tumbling worldwide.

At the same time, the Saudis have reasons to keep production high. Low oil prices should slow the development of share oil and tar sands development in Canada and the United States as well as the move toward alternative energy sources in Europe which both threaten the kingdom’s economic prospects.

Moreover, while Saudi Arabia needs oil to trade at $90 per barrel, it is estimated that the Russians need a price of some $110 per barrel to manage their finances. Iran requires an even higher price but cannot sell enough oil under the embargo which it why it resorted to an expansionary monetary policy that has driven up inflation.

Iran and Russia are both allies of President Bashar al-Assad’s regime in Syria which the Saudis hope to topple and replace with a Sunni-majority government that should be more susceptible to their interests. Similarly, Shiite prime minister Nouri al-Maliki’s administration in Iraq is getting rather too close with neighboring Shia Iran for Saudi Arabia’s comfort. If it manages to persuade Iraq to cut their oil production, it would put the squeeze on Maliki and inhibit his ability to fend off challenges to what the Kurds describe as his increasingly “dictatorial” rule.