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By Shwan Zulal:
Oil prices are falling and set to go even lower as global uncertainty over the EU debt crises and US downgrade continues. It is hard to predict oil prices in the coming six month, but it is becoming clear that the global economy is not able to sustain $100 USD-plus prices for very long.
It is somewhat good news for the developed and developing economies like the US and China and the BRIC countries as it will contribute to their efforts to tame inflation. Nevertheless, it will have a negative impact on the oil producing nations such as Iraq.
After decades of war, Iraq and the Kurdistan Region are recovering and the production of oil has finally been boosted and a large part of the 2011 budget, to the tune of $25 billion, has been allocated for much-needed investments in the infrastructure. However, the downward spiral of oil prices is set to wipe out all the extra production capacity – in terms of revenue – that the KRG (Kurdistan Regional Government) and Iraq federal government have been working on.
Iraq depends on oil for more than 90 per cent of its national income and the federal government budget. Last week oil prices fell by 10 per cent and on Monday the prices fell by over 4 per cent. Considering that the Kurdistan Region’s share of the federal Iraqi budget is 17 per cent and 90 per cent of that is oil-based, it becomes clear that the Iraqi budget will take a big knock. As a consequence, projects and contracts which have been awarded as part of the investment programs may be affected.
The implication beyond the budget shortcomings and cutbacks on spending would be that the fragile Iraqi PM Nuri Al-Maliki’s government would come under more pressure from the public and the political blocs as the cuts bite into already meagre public services.
As the Iraqi budget decreases, the issue of the revenue sharing and budget share of the Kurdistan Region may come to the forefront of the political agenda once again. Although this issue has been very contentious in the past (along with the issues of the legality of the oil contracts and Article 140), rising oil prices and an increase in Iraqi production capacity contributing to higher revenue has made these disagreements less of an issue. However, once the budget comes under pressure due to lower oil prices, the issue could flare again and add to the already strained relationship between Baghdad and Erbil over the oil contracts and Article 140 of the Iraqi constitution (determining the future of the disputed territories).
This latest decline in oil prices and market turmoil is a reminder for the KRG, and the Iraqi Government, that relying on oil revenue alone would make the country very vulnerable to oil price fluctuations.
The last Iraqi budget, approved last February, was estimated at $82.6 billion based on an average of $76.50 per barrel. It is needless to say that crude prices are still above the estimated price and capacity has increased in the last six months since the budget was passed. However, October oil future contracts are already down to mid-$70 range and more declines are possible as the global economic uncertainty continues.
This article first appeared on Kurdish Views
