Iraq crisis threatens oil price shock

Experts are warning of a $US40-a-barrel rise in crude prices if Iraqi production is hit.If the conflict in Iraq forced a third of the country’s oil production offline, it could thrust crude prices up $US40 a barrel, a group of former military leaders and energy experts has warned.
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Although supply fears have abated slightly, the conflict has so far increased the ”risk premium” embedded in international oil prices and put Brent crude just above $US113 on Tuesday.

Further unrest in Iraq could cause oil costs to soar much higher, given the limited buffer of production capacity worldwide able to make up for any significant strife-related shortfalls, according to a new report from Securing America’s Future Energy. Iraq is the second-biggest producer in OPEC, the Organisation of the Petroleum-Exporting Countries, and Saudi Arabia was already under pressure to boost production by 900,000 barrels per day just to keep up with rising global demand.

”The loss of even one third of total Iraqi production – 1 million barrels per day – would essentially eliminate global spare production capacity,” the SAFE report says.

”In that event, oil prices would likely reach or exceed the highs reached in July 2008.”

Despite soaring US production – about 8.2 million barrels per day in March – the nation still imports large amounts of foreign crude.

The International Energy Agency has said Iraq would account for 60 per cent of the increase in OPEC oil production capacity between now and 2020 and be a major driver of global crude production growth even after that point.

The analysis also documents the link between oil price shocks and economic activity in the US.

Every US recession since 1973 has been preceded by or occurred during an oil-price spike, the report notes.

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