Violence In Iraq Could Throttle The US Economy. Here’s Why

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Supporters of Iraqi populist leader Moqtada al-Sadr protest at the Green Zone, in Baghdad

Violence In Iraq Could Throttle The US Economy. Here’s Why

Micaela Burrow on August 30, 2022

  • Iraq’s political situation is growing increasingly unstable after violent protests broke out this week, threatening Iraq’s oil fields
  • Iraq is the world’s third largest oil producer, so disruptions in Iraqi oil supply could cause energy prices to skyrocket globally.
  • “I think ‘evolving’ instability in [Iraq]… will inject greater, more twisted levels of uncertainty into the global economy as the world gets into the first ‘winter’ of Russia’s unacceptable invasion of Ukraine, becoming more than an added distraction point,” Heritage Institute research fellow Anthony Kim told the Daily Caller News Foundation.

Deepening political instability in Iraq may get worse, upending already tight global oil markets and pushing prices up at the pump for U.S. consumers, experts told the Daily Caller News Foundation.

Iraqi supporters of the nationalist cleric Muqtada al-Sadr stormed the cabinet headquarters, forcing the interim government to shut down and sparking violent clashes with opposing pro-Iran militias and Iraqi security forces Monday and Tuesday. Violence also reached the oil-rich areas of Iraq, which if intensified could disrupt production and send oil prices in the U.S. and elsewhere shooting up, experts in geopolitics and commodities told the DCNF.

“The second and third order effects that we’re going to see in terms of an energy shock is really significant,” Simone Ledeen, former deputy assistant secretary of defense for the Middle East, told the DCNF.

An intensified security situation in Iraq could endanger up to one million barrels per day of Iraqi oil production, RBC commodities chief Helima Croft told CNBC Tuesday.

Iraq is the world’s third-largest oil producer and the second largest within the OPEC cartel, with most of its supply going to Asia and Europe, according to the Energy Information Agency. However, any decrease or uncertainty in Iraqi oil supply would send energy prices up, affecting every aspect of the economy as the U.S. may become more dependent on foreign oil.

“What’s unfolding in Iraq will more than likely add upward pressure in terms of price volatility and uncertainty,” Heritage Foundation research fellow Anthony Kim told the DCNF. “I think ‘evolving’ instability in [Iraq]… will inject greater, more twisted levels of uncertainty into the global economy as the world gets into the first ‘winter‘ of Russia’s unacceptable invasion of Ukraine, becoming more than an added distraction point,” he said.

Clashes also emerged in the oil-rich Basra region, with Sadrists burning tires and crowding the streets. Protesters converged around the gates of oil fields and refineries in the southern Iraqi province, but there were no reports of the protesters breaching the installations and disrupting production, according to Reuters.

“Any sign of a supply disruption there would be a concern, particularly given the supply-side issues the world is facing at the moment,” Nader Itayim, Mideast Gulf editor at Argus, explained to the DCNF. “The market is already tight, so any serious outage in Iraq would likely put upward pressure on prices.”

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U.S. oil companies, boosted by increased exports amid surging global demand, boasted record profits, but prices continue to increase. While U.S. President Joe Biden promised to help Europe reduce its reliance on Russian energy, the U.S. is undergoing its own crisis as energy costs continue to skyrocket.

Oil prices trended upward on Monday amid reports of unrest, coming back down Tuesday after state-owned marketer SOMO confirmed that oil exports remained online, according to Reuters. SOMO also said it could redirect future supply to Europe as winter looms and Russia squeezes supply to Europe in response to sanctions levied against it for invading Ukraine, which could free up domestic supply for the U.S.

The let-up in protests would further reduce the risk of disruption to oil supply, Itayim said.

Unrest has throttled the Iraqi government for years, including in 2016, a strongman prime minister typically able to suppress discontents. That’s not the case now, Ledeen told the DCNF.

“It’s a very, very dangerous situation,” she said, suggesting that the unrest could worsen.

While the initial uprising abated after Sadr called for his followers to stand down, advocating for a peaceful revolution, the event only loosens the government’s weak hold on the state and its massive oil and gas fields, Ledeen added.

Iraq’s caretaker prime minister Mustafa Al-Kadhimi has done little to infuse order into the conflict between populist Sadrists and pro-Iran groups, including militias with known ties to the Iranian regime. The country has dealt with political deadlock and repeated calls from Sadr to protest since elections in October.

Sadr’s political platform is opposed to Iran, but he formerly aligned with Iran and led a militia group during the 2003 U.S.-led invasion of Iraq that bears responsibility for the deaths of U.S. troops. Instability in Iraq could give Iran an advantage regardless of which group emerges from the conflict with the upper hand—and that includes Iraq’s oil fields.

“One can assume that this is really, by proxy, the Iranian takeover of Iraqi oil fields and Iraqi oil wealth,” said Ledeen. “It’s part of their goal of regional hegemony.”

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