Violence has returned to key oil-producing countries Iraq and Libya after a brief period of calm.
Shelling and firefights between militias over the control of a key airport in Tripoli have hurled Libya back into a state of emergency, punctuating several weeks of escalating violence in the troubled North African country.
In mid-July, the Libyan government appeared to gain more control over the country’s restive provinces when it secured a deal with rebels in the east, which led to the reopening of the major ports of Es Sider and Ras Lanuf. The accord led to a drop in oil prices as investors anticipated an immediate influx of several hundred thousand barrels of oil per day to global markets.
But the immediate sense of optimism was quickly dashed as Libya struggled to sell its oil. European buyers have kept their distance from what they see as an unreliable supplier. The calm felt in July has vanished as militias continue to fight over control of an airport in Tripoli.
The unrest caused thousands of people to flee the chaos, seeking to cross into Tunisia. But it wasn’t just civilians hoping to leave the country. The U.S. pulled out its embassy staff at the end of July, and several oil companies, including Total, Eni, and Repsol, also withdrew most of their employees.
The violence reached a new level in recent days when shells hit oil storage tanks, igniting the sky into a fiery blaze. The fire spread to a total of eight storage tanks by August 3, and at the time of this writing, raised fears that they would explode, creating an environmental catastrophe.
Before the 2011 overthrow of Col. Mu’ammar Qadafi, Libya was producing 1.65 million barrels of oil a day. Until protests in the summer of 2013 halted production, the government had targeted a full return to the country’s 1.6 million barrel-per-day capacity by the end of that year.
But a quick return of Libya’s oil production seems unlikely at this point. Output dropped to 450,000 barrels per day in the first week of August, compared to 500,000 barrels per day the week before.
The security situation in Iraq is arguably much worse. The Islamic State of Syria and Iraq, after a lightening advance in June, consolidated its gains in the country’s northern provinces. After an initial scare that Iraq’s southern oil fields would be threatened, oil prices eased as it became clear that the enormous fields near Basra were safe for the time being.
But worries reignited on August 3 after the militant Sunni group – now known simply as the Islamic State (IS) – reportedly seized a major hydroelectric dam, Iraq’s largest. The government disputed the fact that IS had taken full control over the dam but conceded that it had taken control of the closest nearby village. If the dam falls, it “would allow the Islamic State to control water systems for the country’s urban areas and farmlands,” Theodore Karasik, director of research at the Institute for Near East and Gulf Military Analysis, told Bloomberg News. “It puts them in a position to influence politics by tampering with water suppliers. They would probably cut supplies,” he added.
IS also routed Kurdish forces and took control over several oil fields. The Ain Zala and Batma oil fields account for over 30,000 barrels per day. The retreat by the Kurdish Peshmerga came as a surprise, as the forces are known to be some of the most disciplined in Iraq. But the Peshmerga was apparently regrouping and mounting a “major offensive” to retake the dam and the towns around it, according to Reuters.
Both Libya and Iraq are major global oil suppliers and the instability in both could cause oil prices to rise once again. After momentarily peaking in July, oil prices recently hit a six-month low, with WTI dropping to $97.88 per barrel on August 1. Renewed tension in the Middle East has many analysts thinking that investors have gone too far in the oil sell-off.
The oil markets have been rather sanguine about the direction of Libya and Iraq, but the sudden deterioration of both countries could bring an end to the slide in prices.
By Nick Cunningham of Oilprice.com