For Oil, Libya Burns, but Iraq Smolders

MARCH 1, 2011    THE WALL STREET JOURNAL

By LIAM DENNING

Oil investors: Don't forget Iraq. While Libya's clashes dominate the oil market, Iraq will have far more impact on prices in the medium term. This weekend's bomb attack on the Baiji oil refinery was a timely reminder.

Reuters

Baiji is small, processing less than 0.4% of global oil supply. But the attack is troubling for two reasons.

First, it seems just two gunmen temporarily shut down the refinery. Baiji should be better prepared: It was Iraq's No. 1 target for insurgent attacks in the first five years after the U.S. invasion, according to Peter Zeihan at Stratfor, a global intelligence firm.

This feeds into the second reason: Iraq's latent production. Right now, Iraq produces about 2.7 million barrels a day, or just 3% of global supply. But its growth potential is enormous. The International Energy Agency puts Iraq second only to Saudi Arabia in terms of increased oil output by 2035, with Iraq producing another 4.3 million barrels a day by then.

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Reuters

Damaged Baiji oil refinery, north of Baghdad, after a bomb attack on Saturday

That may be conservative. Contracts awarded to foreign oil companies aim to boost Iraqi output from existing fields to more than 11 million barrels daily. Even if that is too ambitious, consultancy JBC Energy expects output to hit almost eight million daily barrels by 2020, 67% higher than the IEA's forecast for that year. In contrast, the IEA saw Libyan output remaining flat even before the current crisis began.

Iraq's potential to alleviate tight oil supply and demand makes its infrastructure a prime target for insurgents. And caught between Iranian, American and Saudi Arabian interests, Iraq's development remains hostage to geopolitical rivalries. Oil investors focused on North Africa shouldn't lose sight of the drama unfolding east of Suez.

Write to Liam Denning at liam.denning@wsj.com