Iraq's rapidly expanding oil production is likely to complicate OPEC's efforts to influence world prices as the country re-emerges as a major player after 20 years on the sidelines due to sanctions and strife.
For now, Iraq is backing Iran's push for OPEC to set lower production limits and keep prices high, but Baghdad's own ambitious plans for expansion could cause an overall production growth that might drive down prices.
Analysts say Iraq's new clout is shifting the power balance in the 12-member Organization of the Petroleum Exporting Countries and could force it to overhaul its intricate production quota system to accommodate Baghdad's rapid expansion.
Iraq recently reached oil production of 3 million barrels per day, a level not seen since the 2003 US-led invasion that ousted dictator Saddam Hussein. The country is on track to become OPEC's second-largest producer in the coming year, surpassing Iran and trailing only Saudi Arabia.
“Iraq, for all intents and purposes, could double its production in next five years, could go from 3 million barrels a day to 6
million barrels a day,” said energy analyst Fadel Gheit, managing director of consultancy Oppenheimer & Co. in New York. “No other OPEC country has the ability and capacity to do that.”
Oil prices are determined by many factors, but chief among them is supply and demand. For decades, OPEC has tried to control oil prices by limiting production. Additional production from Iraq, unless offset by reductions from other cartel members, could drive oil prices down.
But OPEC politics are not that straightforward.
At Thursday's OPEC meeting in Vienna, Iraq used its newfound influence to side with its political ally, Iran, against Saudi Arabia, which has been increasing output. Iran, hard hit by economic sanctions over its suspect nuclear program, wants members to cut back production to hike prices. OPEC compromised Thursday, deciding to keep its overall production target at the same level.
Iraq also emphasised its comeback within OPEC by pushing its own candidate for secretary-general during Thursday's meeting in Vienna.
“It reflects the fact that Iraq is saying 'Look guys, it's changed. We're not the permanent problem child of OPEC anymore,'“ said Samuel Ciszuk, an analyst with KBC Energy Economics in London.
The Iraqi candidate, Thamer al-Ghadhban, 67, led Iraq's oil ministry during part of the US occupation and is considered a well-qualified candidate, though the group's politics are likely to tip the balance toward an Ecuadorian nominee when it decides in December.
The last time Iraq had this much voice in OPEC, Saddam Hussein was still in power and the country had just fought the 1980-88 war against Iran that killed as many as a million people on both sides. Iran and Iraq were rivals in OPEC then, bickering over who should give up the most in the production quotas to control world prices.
Much has changed. Now, Iran's theocratic Shiite Muslim government is one of the major allies of Iraqi Prime Minister Nouri al-Maliki, who leads a secular but Shiite-dominated coalition government. At OPEC this week, Iraq sided with Iran in pushing for higher prices through lowering overall production. For now, that's in Baghdad's best interest, since 95 percent of its government revenues come from oil.
Iraq's return to petroleum prominence was not supposed to take this long. Before the US-led invasion, officials in President George W. Bush's administration said that the country's oil exports, long hampered by international sanctions, would recover quickly and possibly even pay for the war.
Like much in the Iraq war, that didn't work out as planned, and the spiraling violence that followed decimated oil production.
In the last year, a rapid expansion of oil production has been a rare positive sign in a troubled democracy still facing spasms of violence.
Iraqi oil exports have grown from an average 1.9 million barrels a day average in 2009 to about 2.5 million barrels a day in May. That is about the same level that Iran was exporting last year, but Tehran's exports are now down to less than 1.8 million barrels per day now because of American sanctions, US officials estimate.
With 143.1 billion barrels of proven oil reserves - the fourth-largest in OPEC - Iraq has plenty of room to grow in both production and exports.
Iraq's rapid expansion in coming years could wreak havoc with OPEC's system of production quotas intended to control prices, according to analyst Ciszuk. The organization wavers between individual country quotas and the current system of an overall production limit for all countries, which it decided Thursday to keep at 30 million barrels a day.
In recent decades, Iraq's oil hasn't figured in that system because its exports were underperforming. But once it surpasses Iran and tops 5 or 6 million barrels per day in production, OPEC members will demand that Iraq rejoin the quota system, probably within two or three years.
With Iraq pumping 3 or 4 million extra barrels a day, other countries would face the choice of either cutting their own quotas to accommodate Iraq or raising the overall production level.
Its ambitious expansion goals and contracts with major oil companies depend on pumping more and more oil, so Iraq's own self-interest in coming years is likely to reverse its stance of pushing for production cuts - despite its political relationship with Iran.
“In the end, you know, it tends to be the money that decides a lot of these things,” Ciszuk said. - Sapa-AP