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OPEC’s No. 2 Under Serious Threat From Political Instability

OPEC’s No. 2 Under Serious Threat From Political Instability

For weeks, large gatherings of protestors have roiled the political establishment in Iraq, forcing the government to scramble to address their concerns while also holding onto a dwindling sense of legitimacy in the eyes of the public.

Political protests in Iraq have grown in strength and size, and over the weekend protestors burst through the walls of the Green Zone in Baghdad where many government buildings are located, and some even entered the parliament building. Hundreds chanted, waved Iraqi flags, and took photographs of an area of the city that they have long been prohibited from entering. The protests recalled images of the Arab Spring, and raised questions about the integrity of the government’s control over the country.

On Sunday, however, the protestors filed out of the Green Zone on orders of Shiite cleric Moqtada al-Sadr, who has been at the forefront of the protest movement for months. He seemed to somewhat condone the storming of the Green Zone, although whether or not he played a lead role in the events is unknown. But he ordered his followers to clean the space and leave. The result was a vivid display of al-Sadr’s power and influence, which he is using to demand political reforms from the Iraqi government. He said that the protestors would return in a few days following the end of a religious holiday. The Shiite cleric made it clear that the only thing standing between the government and the pitchforks was his word. Related: North Sea Oil Town Hit Hard By Low Prices

Iraq’s Prime Minister Haider al-Abadi is trying to put together a cabinet made up of technocrats amid pressure to crack down on corruption, but has faced opposition among some lawmakers in parliament who fear losing influence. If Iraq’s parliament fails to approve a new cabinet, Moqtada al-Sadr has threatened to fight to disband the government and call for elections. The protests came just hours after the Islamic State took credit for a truck bombing that killed at least 21 people.

The political instability is worrying the Iraq’ government’s American backers, and U.S. Vice President Joe Biden swooped in for sudden visit last week to assess the situation, the highest ranking official to visit Iraq since most American troops left five years ago. The Pentagon and the White House are increasingly worried that the Prime Minister’s grip on power is deteriorating.

The implications for the oil sector are still a bit unclear. Political unrest is never good for oil production. Of course, Iraq’s large oil fields in the south are located far away from Baghdad. And Iraq’s oil minister even wrote on Facebook this weekend that no oil output was affected by the events in the Green Zone. But the latest wave of protests inject another degree of uncertainty into Iraq’s future, and the breach of the Green Zone highlights the anger across the political spectrum from the Iraqi public. Related: The Merger That Could Create a New Oil Major

The political instability comes as Iraq faces a long list of other problems threatening its oil sector. Iraq produced 4.2 million barrels of oil per day (mb/d) in March, and exported about 3.28 mb/d through its southern terminals near Basra. Southern exports rose slightly in April to 3.36 mb/d and are not far off from a record high. But the uptick in output masks a lot of problems in Iraq’s oil sector, problems that could yet grow worse.

Plunging oil prices have cut into government revenues at a time when it can ill-afford it, which is reducing earnings for international oil companies who are paid for investment in and production of Iraq’s oil fields. “Politically, things have worsened dramatically in Iraq,” Richard Mallinson, an analyst at Energy Aspects Ltd., told Bloomberg. “It’s a negative for the country’s oil industry over the medium term. We’re going to see production plateau and start to decline later this year.” Private companies are cutting back investment, which could hamper the country’s ability to boost production from today’s levels. Related: Halliburton-Baker Hughes Merger Officially Dead

A separate political standoff with the semiautonomous region of Kurdistan has impacted oil flows in Iraq’s north. Kurdistan depends on oil exports through Turkey for nearly all of its revenues, and because of the interruptions, as well as its stalemate over revenue sharing with the Iraqi central government in Baghdad, the Kurdish Regional Government is facing a fiscal crisis.

Meanwhile, the fight against ISIS continues to gain ground. “The purely military aspects of the campaign appear to be progressing well, finally beginning to hit on all cylinders,” Kenneth Pollack of the Brookings Institution wrote in late March after a trip to Iraq. But, “military success is not being matched with the commensurate political-economic efforts that will ultimately determine whether battlefield successes are translated into lasting achievements.” In other words, Iraq and the U.S.-led coalition could continue to beat back ISIS, but unless the Iraqi government can put together a political process and advance an agenda that addresses a lot of the country’s problems – admittedly a very difficult proposition – the Iraqi government will continue to lose legitimacy. That will destabilize the country even more.

By Nick Cunningham of Oilprice.com

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