Thursday, August 13, 2009

Iraqi Oil Finally Meets Production And Price Goals Set In Budget

In July 2009 the Iraqi Oil Ministry announced that oil exports had finally reached the 2 million barrel a day mark set in the 2009 budget. In that month the Oil Ministry reported that it exported 2.03 million barrels a day, the largest amount since the U.S. invasion. That was up from June’s average of 1.92 million barrels. In July the average price of a barrel of Iraqi crude was between $60 to $61 dollars, which was a decrease from June when it went for $64.37. The 2009 budget originally called for a $50 a barrel price, which was finally met in May when Iraqi oil went for $57.16 a barrel. May was also the first month that Iraq brought in the $3 billion in oil revenue required in the budget. Despite these increases, Iraq is still facing a large budget deficit.

While Iraq’s exports are up in 2009, they are not at their highest post-war level, which was achieved in the first six months of 2008. Iraq’s overall exports in the 1st half of 2009 were up to 1.87 million barrels a day, compared to the last half of 2008 when Iraq exported an average of 1.75 million barrels a day. However, Iraq’s oil production has always gone up and down, so neither of those halves were as high as the first half of 2008 when Iraq averaged 1.93 million barrels a day.

Monthly Oil Production (mil/bar/day)

1st Half of 2008 Avg. 1.93
2008
July 1.85
Aug. 1.7
Sep. 1.65
Oct. 1.69
Nov. 1.88
Dec. 1.73
2nd Half of 2008 Avg. 1.75
2009
Jan. 1.89
Feb. 1.89
March 1.81
April 1.82
May 1.90
June 1.82
1st Half of 2009 Avg. 1.87
July 2.03

Baghdad responded to the increase in exports and revenue by presenting parliament with a supplemental budget of around $3 billion on July 19, 2009. The Finance Committee in parliament however, said that it had such a large deficit, that there was no reason to pass it. This was no surprise as the original budget is running a deficit already. If it called for $3 billion a month, then in the first six months Iraq needed to bring in $18 billion from oil, but only earned $11.13 billion.

To make up the difference, Baghdad was discussing a loan and hoping for bonuses from international companies investing in Iraq’s oil sector. The Finance Minister was discussing a $7 billion 2-year loan from the International Monetary Fund in May 2009. The amount went down to $5.5 billion over 5 years by June, until later in that month the Finance Minister said he had cancelled the deal hoping that increased exports would meet the country’s needs. That may turn out to be wishful thinking. Iraq was also hoping for an influx of cash from its first round of oil bidding in June 2008. The Oil Ministry asked for large up-front signing bonuses from the international oil companies, but after only one bid was accepted, that hoped for money is unlikely to materialize. As of July 2009 then, Iraq was expected to run a $16 bill deficit, the first since the 2003 invasion.

Iraq’s Monthly Oil Revenues – 2009
Jan. $2.15 bil
Feb. $1.7 bil
March $2.49 bil
April $2.69 bil
May $3.4 bil
June $3.17 bil

As reported before, the budget deficit has had wide ranging effects upon Iraq from a hiring freeze to holding up new development projects in the provinces. Iraq is almost completely dependent upon oil for its revenues, so the economy goes up and down with the price of crude. The government doesn’t plan for this, so when oil prices skyrocketed in 2008 it signed hundreds of development projects, hired new workers, and raised their pay. That has come back to bite them this year with the world recession as operational costs take up $45.9 billion of the $58.6 billion 2009 budget. The parliament was also either misled or didn’t take the time to ask the Finance Ministry or Central Bank, which hold Iraq’s sizeable surpluses whether they could use that money for the 2009 budget, because when they were drafting it they consistently said they would draw upon this reserve to make up the deficit, but after the budget was passed they were told they couldn’t touch that money. This seems like an extreme case of incompetence on the part of the Iraqi government. Even now when faced with a sizeable deficit, the cabinet still acted like this was a normal year and suggested a supplemental budget. Iraq is famous for lacking trained and competent bureaucrats because of the brain drain caused by the violence, and inexperienced politicians. The budget is a perfect example of both. It will probably take several years of trial and error like the last few years before Iraq’s government gets the hang of planning and managing its money. In the meantime, the country will suffer for it with inconsistent government spending, which is largely responsible for driving the economy and providing jobs.

SOURCES

Alsumaria, “Iraq is considering a supplementary budget,” 6/25/09

Al-Ansary, Khalid, “Iraq, IMF near agreement on $5.5 bln standby deal,” Reuters, 6/16/09

Aswat al-Iraq, “Finance ministry to sign new agreements with IMF,” 5/27/09
- “Increase in oil exports contributes to budget balance – ministry,” 6/2/09
- “Iraq’s oil exports reach $3.17m in June 2009,” 7/22/09
- “Supplementary budget shows deficit of ID3.9 trillion,” 7/29/09

DiPala, Anthony, “Iraq Oil Export Income Rose 8.2% to $2.69 Billion in April,” Bloomberg, 5/25/09

Lando, Ben, “Iraq oil exports, revenue up,” Iraq Oil Report, 6/29/09

Reuters, “UPDATE 1-Iraq’s oil exports rise to 2.037 mln bpd in July,” 8/2/09

Sly, Liz, “Economic downturn finally hits Iraq,” Los Angeles Times, 5/11/09

Special Inspector General for Iraq Reconstruction, “Quarterly Report and Semiannual Report to the United States Congress,” 7/30/09
- “Quarterly Report and Semiannual Report to the United States Congress,” 1/30/09
- “Quarterly Report to the United States Congress,” 4/30/09

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