Friday, March 6, 2009

Ups And Downs Of Iraq’s Oil Industry And Its Implications For The Budget

A government official recently announced Iraq’s oil figures for February 2009. Exports were slightly down from the previous month. That accounted for a drop in revenue despite prices staying the same. The country’s production has always fluctuated for a number of reasons, both man made and natural. A bigger issue is what the price of Iraqi crude means for the budget.

In early March 2009 an Iraqi oil official announced that February’s exports and revenue were below February numbers. In January 2009 Iraq sold around 1.9 million barrels of oil a day for an average price of $37 a barrel. That brought in approximately $2.15 billion. By February exports had declined to about 1.8 million barrels a day. The price stayed the same, but revenues were down to $1.7 billion. Aging infrastructure and bad weather were blamed for the change between the two months.

Overall, Iraq’s production has been increasing over the last year. January’s numbers were an improvement over December 2008 when Iraq exported 1.82 million barrels a day. Total production was up in 2008 at 850.239 million barrels compared to 742.079 million in 2007. Exports were also up 13.3% from 2007 to 2008. However total production dropped for the last three months of 2008. The country has never reached pre-war levels either. Today the country averages between 2.3-2.4 million barrels a day in overall production, but before 2003 it produced 2.58 million.

The continual fluctuations in oil production and the low prices have big implications for Iraq’s immediate future. This year 85% of Iraq’s revenues are expected to come from petroleum. The 2009 budget, which was just passed by parliament, is based upon a $50 a barrel price for oil and 2 million barrels a day of exports. With prices low and production not going up any time soon, that means running a deficit, which could be up to $30 billion out of a $58.6 billion budget. The Finance Minister says that it will use its savings to cover the difference, but it only has around $35 billion. That would mean depleting almost its entire account for one budget, with no guarantees that in 2010 there would not be similar problems unless the world economy recovers. For this reason, the Finance Ministry is also considering floating $5 billion in government bonds to help fund projects. On the other hand, the Oil Ministry has been desperately trying to sign contracts with foreign countries to increase production. Some service deals have been signed, but the major international oil companies have not come to an agreement with Baghdad yet, and are arguing over the terms of the contracts.

Iraq has no flexibility in its oil production. The government wants to bring in foreign companies to boost output and add needed know how and investment, but the negotiations have been inconclusive so far. That’s not soon enough however for Iraq’s 2009 budget which is based upon a higher price and export numbers than Iraq is now capable of. If Baghdad goes ahead with its budget it will be running a huge deficit that will affect all sectors of the country from the economy, which is largely state-run, to employment as the government is the largest employer. It might also influence the parliamentary elections scheduled for the end of the year as many of the winning parties in the January 2009 provincial elections promised better services. That may not be possible under the current budget and oil output.

SOURCES

Abdul-Zahra, Qassim, “Iraq passes sharply reduced budget for 2009,” Associated Press, 3/5/09

Associated Press, “Iraq’s oil exports down in February,” 3/3/09
- “Iraq’s oil exports inch up in January,” 2/1/09

Aswat al-Iraq, “GDP higher by 10.9 % in 2008,” 2/11/09

Al-Hashemi, Mostafa, “$25 billion surplus staves off financial crisis – Iraqi minister,” Azzaman, 2/2/09

Mackey, Peg, “Iraq to rely on own technicians to reverse output decline,” Reuters, 2/24/09

Madhani, Aamer, “Iraq’s economy sputters as oil prices drop,” USA Today, 1/28/09

Reuters, “Iraq’s Legal and Security Risks Still Frighten Firms,” 2/13/09
- “UPDATE 1-Iraq to issue 1st post-Saddam bonds for $5 bln,” 1/28/09

Robertson, Campbell and Glanz, James, “Falling Revenues Threaten Rebuilding and Stability in Iraq,” New York Times, 2/26/09

Ryan, Missy, “Falling Oil Price Could Hamper Iraqi Military,” Reuters, 2/9/09
- “Iraq must focus on reconstruction upkeep, U.S. says,” Reuters, 2/4/09

Special Inspector General for Iraq Reconstruction, “Quarterly Report and Semiannual Report to the United States Congress,” 1/30/09

Al-Tameemi, Alaa, “Parliament divided on 2009 budget,” Azzaman, 3/4/09

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