Courtesy Reuters A U.S. Geological Survey satellite image shows smoke rising from the Baiji refinery near Tikrit, June 18, 2014.

Iraq and the Oil Market

How Much Will Prices Rise?

It stands to reason that one of the effects of the turmoil in Iraq will be a change in oil prices. Indeed, the violence in OPEC’s second-largest producer has already sent oil prices to ten-month highs. A recent report from the International Energy Agency (IEA) put it well: “while Iraq’s production is huge, so are the political hurdles it is facing -- and nothing provides a clearer example of that risk than the military campaign.”

Yet this is no time to panic. For one, Iraq is not the only dark cloud hovering over the world oil market. Libya, with its 48 billion barrels of reserves, is pumping a mere ten percent of what it can, the lowest level since September 2011. Sabotage has significantly reduced the flow of oil out of Nigeria as well. And, if Iran and the West can’t reach a deal on Iran’s nuclear program in July, Iran could soon be facing renewed sanctions on its oil industry. In other words, Iraq might be the least of the world’s worries.

Further, despite some weaknesses in production, world oil supply is actually fairly healthy at the moment -- up a million barrels a day over just a year ago. It isn’t because of OPEC. (At a recent meeting in Vienna, OPEC members decided to keep producing 30 million barrels a day, as they have for nearly three years.) Rather, supplies are up because of North American production. In addition, China has diversified its sources of

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