Wednesday, June 18, 2014

Oil Prices And The Conflict In Iraq--A Very Close Correlation!

Iraq Breaks Down, Oil Surges
by Chris Martenson

The situation in Iraq is serious, and is probably going to get worse before it gets better. The potential for this recent action to morph into a regional conflict is very high. That that means that oil could go a lot higher, and if it does, we can expect the odds of a global economic recession and an attendant financial crisis to go up considerably from here.
Before we dive into what's actually happening over there right now, I need to begin with a longer and deeper historical context of the region, which is essential to understanding pretty much everything in the Middle East. The western press likes to report on things as if they suddenly occur for no discernible reason, context-free and unconnected to our actions and activities over there. But the story of the Middle East is a story of intense external meddling -- especially by the US, recently. 
Further, I happen to hold the view that when an entire population resorts to violence, it's a sign that they feel they have no other options or opportunities.  Whether it's a financially-strapped fired US employee lashing out at their former bosses and co-workers, or an Arab youth raised in utter poverty deciding that military extremism makes sense, I see the same dynamic at play.
People, like animals, when cornered will take whatever path remains for them to escape. If left with no other paths besides violence, then violence is what you get.  It's not really all that hard to understand, and yet the US media goes out of its way to try and frame violent unrest as some form of inexplicable evil that magically appears for no good reason.
Well, there are plenty of reasons why violence exists in the Middle East (and has for a very long time). And most of those have to do with resources, and their exceptional scarcity in a desert environment.  
Of course, the Middle East isn't unique in this. For instance, the early European Viking raids and endless wars between the European kings during the middle ages were all essentially resource wars. To understand the reasons for war -- both ancient and modern --  you need to start with resources.  
So whenever I hear terms like 'radical militants' or 'Jihadists' or even 'terrorists', what I hear instead is 'people with poor resources who believe they have no other options.'  The unpleasant truth that threatens the dominant western narrative is that all humans, if they have access to sufficient resources and opportunities, are generally peaceful. By the time an entire population has been 'radicalized', the causal problems have been simmering for a long time and, as a result, will not be easily remedied.

Iraq Is Not Really A State

To start this story, we have to go back to the period just after WW I when Britain and France were divvying up the spoils of the region between themselves. 
Iraq did not exist prior to these two western powers taking out a map of the Middle east, a ruler and a pen, and summarily drawing straight lines that happened to rather inconsiderately cut across cultural, language and racial boundaries. The architects of this secret agreement were a Brit by the name of Sykes and a Frenchman by the name of Picot.
Prior to this Franco-British interference, the area was called Mesopotamia and had long been ruled by a contentious but roughly-balanced mixture of tribes and kings.
Here's the old Mesopotamia in green as compared to the borders drawn by Sykes & Picot:
To understand the current conflict, you have to understand the history of the borders, how they were drawn, and the extent of western plundering and meddling -- which began long before the Bush Iraq wars (I & II) began.
The old partition of the Middle East is dead. I dread to think what will follow
June 13, 2014
The entire Middle East has been haunted by the Sykes-Picot agreement,which also allowed Britain to implement Foreign Secretary Arthur Balfour’s 1917 promise to give British support to the creation of a Jewish “homeland” in Palestine.
The collapsing Ottoman Empire of 1918 was to be split into two on a north-east, south-west axis which would run roughly from near Kirkuk – today under Kurdish control – across from Mosul in northern Iraq and the Syrian desert and through what is now the West Bank to Gaza.
Mosul was initially given to the French – its oil surrendered by the British in return for what would become a French buffer zone between Britain and the Russian Caucasus, Baghdad and Basra being safe in British hands below the French lines.
But growing British commercial desires for oil took over from imperial agreements. Mosul was configured into the British zone inside the new state of Iraq (previously Mesopotamia), its oil supplies safely in the hands of London.
It bears mentioning that the area the French and British allotted to themselves was already fully-populated by the people who lived there. However the area was already determined to be rich in oil and other commodities, and both colonial powers were well-practiced at the art of dividing and conquering local people in order to take their resources.
For the people of Mesopotamia, western resource plundering has only accelerated since the arbitrary lines that comprise the 'state' of Iraq were drawn. 
Of course, it's quite likely that Iraq's border were specifically drawn to cut across ethnic boundaries and thereby assure a failed state, because Britain had learned through history that failed states were the easiest to control. This was their preferred MO in India and numerous other colonies, and by 1916 it was a more or less perfected tool of statecraft.
But whether it was ineptitude or malign intent, the fact remains that Iraq was never a logical geographical entity; and its natural state would be to split into three autonomous regions: Kurds to the north, Sunnis to the west and Shiites to the south.
As a quick reminder, the differences between Sunni and Shiite Muslims stems from a split made shortly after the prophet Muhammad died in 632:
Sunni and Shia Islam are the two major denominations of Islam. The demographic breakdown between the two denominations is difficult to assess and varies by source, but a good approximation is that approximately 87-89% of the world's Muslims are Sunni and approximately 11-12% are Shia, with most Shias belonging to the Twelver tradition and the rest divided between several other groups.
Sunnis are a majority in most Muslim communities: in Southeast Asia, China, South Asia, Africa, and most of the Arab world. Shia make up the majority of the citizen population in Iran, Iraq and Bahrain, as well as being a politically significant minority in Lebanon. Azerbaijan is predominantly Shia, however practicing adherents are much lower. Pakistan has the largest Sunni and second-largest Shia Muslim (Twelver) population in the world.
Sunnis believe that Abu Bakr, the father of Muhammad's wife Aisha, was Muhammad's rightful successor and that the method of choosing or electing leaders (Shura) endorsed by the Quran is the consensus of the Ummah (the Muslim community).
Shias believe that Muhammad divinely ordained his cousin and son-in-law Ali (the father of his grandsons Hasan ibn Ali and Hussein ibn Ali) in accordance with the command of God to be the next caliph, making Ali and his direct descendants Muhammad's successors. Ali was married to Fatimah, Muhammad's daughter from his wife Khadijah bint Khuwaylid.
The reason it's important to know the differences between the two main forms of Islam involved is because the balance of power is split across the Middle East is based on which form dominates a given area.
Saudi Arabia is almost entirely Sunni and has been supporting the rebels in Syria and, by extension, in the rebels now in Iraq as well. Iran, on the other hand, is Shiite, as is most of Baghdad and southern Iraq.
The awkward part of this story is that if the US does get involved to help Baghdad out militarily, it would mean fighting on the same side as Iran (and against the forces the Saudi Arabia supports):
Iran sends troops into Iraq to aid fight against Isis militants
June 14, 2014
Iran has sent 2,000 advance troops to Iraq in the past 48 hours to help tackle a jihadist insurgency, a senior Iraqi official has told the Guardian.
The confirmation comes as the Iranian president, Hassan Rouhani, said Iran was ready to support Iraq from the mortal threat fast spreading through the country, while the Iraqi prime minister, Nouri al-Maliki, called on citizens to take up arms in their country's defence.
Addressing the country on Saturday, Maliki said rebels from the Islamic State of Iraq and the Levant (Isis) had given "an incentive to the army and to Iraqis to act bravely". His call to arms came after reports surfaced that hundreds of young men were flocking to volunteer centres across Baghdad to join the fight against Isis.
In Iran, Rouhani raised the prospect of Teheran cooperating with its old enemy Washington to defeat the Sunni insurgent group – which is attempting to ignite a sectarian war beyond Iraq's borders.
No wonder Washington is hemming and hawing!  There's no way for Obama to send support to Baghdad without undercutting a lot of carefully laid anti-Iranian propaganda.  What, we're going to be fighting on the same side now as our longtime "Death to America!" adversary?  Politically this is a real pickle.
But such an unnatural alliance may be happening:
US sends aircraft carrier to Persian Gulf as Obama considers air strikes in Iraq
June 14, 2014
The US is sending an aircraft carrier and two guided missile ships into the Persian Gulf, bolstering sea and airpower before a possible US strike on the jihadist army in Iraq in the coming days.
Defense secretary Chuck Hagel ordered the USS George HW Bush into the Gulf on Saturday, a day after President Barack Obama indicated he would soon decide on air strikes against the Islamic State of Iraq and the Levant (Isis), whose seizure of Sunni Iraqi cities has violently upended the region.
A bit ironic to be sending the USS George Bush, but there you have it.  Once again, the US is poised to deliver more military solutions to what are, at heart, political problems. 
As I've posted before, I think that sending your biggest ships into the the Persian Gulf bathtub is an outdated tactic that will not last long if/when modern anti-ship missiles are brought into that theater, such as the very impressive Yakhont-800 supersonic anti-ship cruise missile:
The truly awkward part for US foreign policy here is that Iran could likely come out of this with even more influence over Baghdad -- possibly even enjoying a permanent 'protector' role until or unless some other entity wants to step up to the plate and commit to the job.
Mission Accomplished?  That's going to go down as one of the most premature declarations of all time. More like Missing Accomplishment, if you ask me.

A Lightning-Fast Advance

The situation in Iraq developed fast and continues to move quickly.
Allegedly, nobody saw the rebels from the Islamic State of Iraq and the Levant (Isis) coming. "There was no warning".
I find that doubtful given all the tools of State right now, but whether warnings were ignored or not, ISIS has moved incredibly fast seizing one city after another as they've spread southards:
Islamist Insurgents Advance Toward Baghdad
Jun 11, 2014
Islamist militants swept out of northern Iraq Wednesday to seize their second city in two days, threatening Baghdad and pushing the country's besieged government to signal it would allow U.S. airstrikes to beat back the advance.
An alarmed Iraqi government also asked the U.S. to accelerate delivery of pledged military support, particularly Apache helicopters, F-16 fighters and surveillance equipment, to help push back fighters from the Islamic State of Iraq and al-Sham, an al Qaeda offshoot known as ISIS. The U.S. said it has been expediting shipments of military hardware to the Iraqis all year.
Iraqi Foreign Minister Hoshyar Zebari said his country faces a "mortal threat" from the ISIS insurgents.
Officials declined to say whether the U.S. would consider conducting airstrikes with drones or manned aircraft. The Obama administration is considering a number of options, according to a senior U.S. official who added that no decisions have been made.
Bernadette Meehan, a White House National Security Council spokeswoman, said the current focus of discussions with Iraq "is to build the capacity of the Iraqis to successfully confront and deal with the threat posed by [ISIS]."
ISIS overran Tikrit, the birthplace of former dictator Saddam Hussein, on Wednesday after capturing Iraq's second-largest city, Mosul, a day earlier. The takeover of the city of 250,000 about 85 miles north of Baghdad was confirmed by Ali Al Hamdani, a senior official in Salah Al Din province, where the city is located. The insurgents freed hundreds of prisoners from the city's jails.
By Wednesday evening, there were reports of fighting between Iraqi security forces and Islamists on the outskirts of Samarra, a city further south and less than 80 miles north of the capital.
Regional officials said they were worried that significant stocks of weapons ISIS fighters stole from military bases in northern Iraq could be transported across borders and used in conflicts and terror attacks elsewhere.
U.S. counterterrorism officials said on Tuesday that the attacks show the degree to which Islamist militants have established a revolving door between Iraq and Syria, with fighters flowing easily between the two countries and fueling conflict in both.
Somehow, ISIS rebels numbering in the hundreds, or perhaps low thousands, have managed to rout two full Iraqi brigades numbering some 30,000 troops from their positions and send them fleeing. That tells you everything you need to know about the esprit de corps of the Iraqi 'army.' It's not an effective fighting force at the moment.

Awkward Alliances

Now we get to the second awkward part of this story for the US. Along with Saudi Arabia, the US has been supplying weapons and training to the Syrian rebels many of whom are now heading south towards Baghdad.
To fight them would essentially mean fighting our own weapons and training. 
I'm really impressed with the ability of the US news industry, such as in the article above, in keeping out the extremely obvious connection between the hard line Syrian rebels we are supporting and the ISIS rebels now heading south. 
After all, it's not like the news is hidden, or only located on the fringe of the blogosphere. It's been widely reported for over a year that the US has been providing high level training and weapons to the Syrian rebels. Note that this next article from the Washington Post is over 9 months old:
CIA begins weapons delivery to Syrian rebels
Sept 11, 2013
The CIA has begun delivering weapons to rebels in Syria, ending months of delay in lethal aid that had been promised by the Obama administration, according to U.S. officials and Syrian figures. The shipments began streaming into the country over the past two weeks, along with separate deliveries by the State Department of vehicles and other gear — a flow of material that marks a major escalation of the U.S. role in Syria’s civil war.
Even more recently, it's been reported that the US has provided high tech anti-tank and anti aircraft weapons systems and training. This is state-of-the-art warcraft for ground troops:
U.S. training Syrian rebels; White House 'stepped up assistance'
June 12, 2014
WASHINGTON — White House officials refused to comment Friday on a Los Angeles Times report that CIA operatives and U.S. special operations troops have been secretly training Syrian rebels with anti-tank and anti-aircraft weapons since late last year, saying only that the U.S. had increased its assistance to the rebellion.
The covert U.S. training at bases in Jordan and Turkey began months before President Obama approved plans to begin directly arming the opposition to Syrian President Bashar Assad, according to U.S. officials and rebel commanders.
“We have stepped up our assistance, but I cannot inventory for you all the elements of that assistance,” White House Press Secretary Jay Carney said. “We have provided and will continue to provide substantial assistance to the Syrian opposition, as well as the Supreme Military Council.”
And PBS recently weighed in with a documentary on the matter, describing training in Qatar which disturbingly sounds a lot like instruction in how to commit war crimes:
Syrian Rebels Describe U.S.-Backed Training in Qatar
May 26, 2014
WASHINGTON — With reports indicating that forces loyal to Syrian President Bashar Assad are gaining ground in that country’s brutal civil war, moderate Syrian rebels have told a visiting journalist that the United States is arranging their training in Qatar.
In a documentary to be aired Tuesday night, the rebels describe their clandestine journey from the Syrian battlefield to meet with their American handlers in Turkey and then travel on to Qatar, where they say they received training in the use of sophisticated weapons and fighting techniques, including, one rebel said, “how to finish off soldiers still alive after an ambush.”
The interviews are the latest evidence that after more than three years of warfare, the United States has stepped up the provision of lethal aid to the rebels. In recent months, at least five rebel units have posted videos showing their members firing U.S.-made TOW anti-tank missiles at Syrian positions.
The weapons are believed to have come from Saudi Arabia, but experts on international arms transfers have told McClatchy that they could not have been given to the rebels without the approval of the Obama administration.

At Risk: MUCH Higher Oil Prices

The summary here is that the 'rebels' the US is supporting in Syria are part of the very same group that is now headed towards Baghdad.  They are all Sunni hard liners and they will not rest until they have created a new Sunni state for themselves. 
It's really that simple.
What's not simple is understanding what the US' motivations are here in wanting to topple so many regimes in the Middle East and North Africa.  Is it to appease our Saudi allies who also support Sunni causes across the region?  Is it to create an entire region of failed states because that serves some larger master plan?
Most importantly, did the US really think that we could both arm the Sunni rebels andsupport the brutal Shiite hard liner al-Maliki (the current president of Iraq) in Baghdad as he consolidated Shiite power at the expense of the Sunnis?  Why arm and support both sides, unless the goal was a bloody and protracted stalemate?
At any rate, US foreign policy is again in tatters and if it seems like there's no solid plan here, perhaps that's because there isn't one.  It's either a really complex and genius plan or intense bumbling and stumbling.  Sometimes it's hard to tell these things apart.
There was practically no chance of Iraq holding together after the US destroyed the country and then left it without any functioning state apparatus strong enough to withstand 14 centuries' worth of carefully-nurtured resentments in a harsh land with little going for it beyond the oil that will someday be gone.
At any rate, we'll just have to keep watching as all this develops. In the meantime, the biggest risk here is that this becomes a wider regional war.  One that begins by enveloping all of Iraq and which cuts off that countries oil exports for a while.
In Oil at Risk, we lay out the very real and growing risk that a coming decrease in Iraq oil exports created by the current turmoil will result in an oil price spike that could approach $150 per barrel (or even worse under certain situations). Such a development would almost certainly plunge the global economy back in to Recession and financial crisis. We address the defensive steps concerned individuals should take now in advance of such a highly undesirable turn of events.
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Oil at Risk
Executive Summary Why this Iraq crisis comes at a very vulnerable time for world oil markets The three mostly likely outcomes to the current crisis, and the resulti...
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Executive Summary

  • Why this Iraq crisis comes at a very vulnerable time for world oil markets
  • The three mostly likely outcomes to the current crisis, and the resulting oil price of each
    1. ISIS remains contained from here
    2. ISIS takes Bagdad and points south
    3. A more widespread Middle East conflict erupts
  • The growing risk to the global economy & financial markets
  • What concerned individuals should do now
If you have not yet read Iraq Breaks Down, Oil Surges, available free to all readers, please click here to read it first.
The biggest risk to the world economy from the developing Iraq situation is that the price of oil could spike higher, killing the sputtering economic 'recovery' and triggering both a new global Recession and financial crisis.
Now, here's the truly interesting part of where we are in this story.
The IEA (International Energy Agency) has recently called for OPEC to deliver more oil by year end, which I wrote about here, and especially called upon Saudi Arabia to do so because world oil supplies are incredibly tight right now.  OPEC is the only entity in the world with any identifiable 'swing production', as all of the non-OPEC nations are alrady producing at maximum capacity. At least, the hope is that OPEC has additional production capacity.
In the prior piece mentioned, I wrote that of the 12 OPEC members, 8 are in a sustained decline trend for a variety of geological or political reasons. Only 4 are not. Only 1 actually has shown a significant increase in oil production over the past few years -- and that was Iraq, which had added 1.5 mbd recently:
Here's what's at risk if the ISIS rebels push further south:
The IEA is already calling on OPEC to deliver 1.2 mbd more by year end 2014. If Iraq's production is lost, then we can just add that amount to the 'needed total' that the IEA has requested be brought on line by Saudi Arabia, an amount that I already sincerely doubt they can meet. If even a portion of Iraq's production is lost, then we can just kiss $110 barrel good-bye and say hello to $150 per barrel oil. War is messy and it's never easy to predict what might happen, but we'd be foolish to not consider what might happen here.
The true game-changer for the world will come when Saudi Arabia is revealed to be at its maximum in terms of oil production. They claim to have 12.5 mbd of capacity, and perhaps they do, but we won't know until they demonstrate by actually pumping more. There's so much mystery surrounding the Saudi reserves and status of their existing reservoirs that I really don't know one way or the other. But I have my doubts. The fact that Saudi Arabia chooses to be so secretive only fuels them.
After all, if they have nothing to hide then why are they hiding so much?  
All we do know, is that eventually finite things become depleted. And the main Saudi oil fields are 50-60 years old, which is a very advanced age for even the best oil reservoirs. Will this be the year that the Saudi fields hit their limit? Is that date another ten years out?  We really don't know but when that day comes, our prediction is that world recognition of Peak Cheap Oil will be sudden and have dramatic repercussions.

A Regional Specter

Think of all the simmering hatreds, the long feuds, the things we almost certainly don't know about that have been going on behind the scenes for a very long time, and the powder keg that is the Middle East seems even more unstable.
But the threat to global oil supplies and prices potentially extends beyond just the Iraqi oil. Iraq could be the spark that ignites a regional conflict, with the two main power centers being Iran representing the Shiites and Saudi Arabia representing the Sunnis.  
And of course they sit right across the Persian Gulf from each other, the most important stretch of water in the world when it comes to oil.  The mouth of this relatively tiny gulf is the Strait of Hormuz, an exceptionally narrow channel of water through which 40% of all exported oil passes -- some 17 million barrels per day out of a global export total of 43 million barrels per day.
Now, it's a real stretch to go from a few rebels in Iraq driving Toyotas with machine guns on them to the Strait of Hormuz being compromised, but the specter of a regional conflict that ends up pitting Shia against Sunni has the chance of doing exactly that.
I don't think it would happen overnight, and that there would likely be plenty of warning signs along the way. But should a regional conflict break out the global repercussions would be so traumatic that you'd want a big, fat head start on your preparations.  
If just Iraq's production and exporting gets compromised, I expect $150 per barrel oil. If the Strait of Hormuz gets compromised, then the price will be astronomical by current standards -- with the even bigger worry being simply getting your hands on the stuff.  Rationing and shortages would soon follow any compromise of the Strait of Hormuz, possibly within a month or less.
How long could the world withstand the loss of oil shipments through the Strait before serious trouble set in?  Given the current status of above-ground stockpiles, at current rates of consumption and non-OPEC production it's only ~50-60 days before all of the above-ground tanks are emptied.  
Of course, we'd never make to 50-60 days before emergency rationing was implemented because it's not possible to run things down to the point that we empty the last pipelines heading into the refineries.  A minimum amount of oil has to remain 'in the system' or it becomes dangerously de-pressurized and cannot function. The pipelines have to remain full or else the system shuts down. And getting it restarted is a lengthy and expensive chore. 
Finally, there's simply no chance that various countries with military machines would allow their stockpiles to be burned through to support the driving habits of ordinary people. Triage would have to be conducted to preserve oil for emergency and critical services. Keeping emergency vehicles and services running, food delivered, and the military supplied would all take precedence to civilian uses.

Scenarios

To put some definition on this, let's use three scenarios.

Scenario 1: The ISIS drive stalls right about where it is and no further gains are made to the south

In this scenario we can expect Iraq to slip a little further into the ugly reality in which it has been steeping ever since the US invaded.  Sectarian violence continues with car and suicide bombings as a part of daily life, leading to unsafe conditions for everyone, locals and foreigners alike.
The situation was already incredibly violent with mass bombings taking place with crushing regularity all over the southern region.
Suicide bombings, attacks in Iraq kill 33 people
Apr 21, 2014
Over the past year, violence has surged in Iraq to levels unseen since 2008. The increase in deadly shootings and bombings has become the Shiite-led government's most serious challenge as the nation prepares to head to the polls on April 30 — the first vote in Iraq since the U.S. army withdrawal in 2011.
Monday's deadliest attack took place south of Baghdad in the town of Suwayrah, where a suicide bomber rammed his explosives-laden car into a police checkpoint, killing 12 people — five policemen and seven civilians. A police officer said 19 people were wounded in the attack.
In the nearby town of Madain, about 20 kilometers (14 miles) southeast of Baghdad, another suicide car bomber struck an army checkpoint, killing three soldiers and two civilians, a second police officer said. Twelve other people were wounded, he said.
An Iraqi soldier was killed and three were wounded when a roadside bomb struck their patrol in the northern town of Mishahda, 30 kilometers (20 miles) north of Baghdad, a police officer said. And in the town of Latifiyah, about 30 kilometers (20 miles) south of Baghdad, gunmen in speeding car went on a shooting spree, killing one civilian and wounding two, a police officer said.
Monday evening, four more bombs struck various parts of Baghdad, killing at least 14 people and wounding 40, police said.
Clearly the situation all around Baghdad is already enormously insecure and any consolidated gains by ISIS will only assure that more such attacks can occur in the future.
All of the potential oil gains to the north remain locked in place as no foreign or local investments are made for many years until the situation stabilizes.  Even more troubling, the major North and West flowing pipelines carrying both oil and gas are now under the control of the ISIS rebels/state and are therefore highly insecure.
Keep this map in mind as it plays out in all three scenarios:
The ISIS rebels can decide to blow these pipelines, bleed them, or ransom them for a heavy take of the flowing profits/assets.   
However, in this scenario the southern oil flows are not impacted and the current rates of production can be maintained, although additional gains are muted due to uncertainty and fear over the situation by foreign investors.
The main conclusion for this scenario is that the best - the very best - that the world can hope for is that the current rate of ~3.5 mbd of Iraqi oil production is maintained and that all exports continue as is.  No further oil gains are forthcoming for at least one calendar year.
This means that Saudi production is the last and best hope for additional world supplies and nobody knows (yet) if they can deliver as promised.  If so, I expect oil to 'only' climb to $120 per barrel and remain there for the next year at which point either the Iraqi situation has stabilized allowing more production to be brought on line allowing oil to drift back lower or it hasn't in which case the next target for oil is $130.
However, if the Saudis cannot bring more oil to the market because geology is truly in command now, then the Saudis will not bring more oil to the market and prices will climb further.  They will say anything and everything except mentioning geology, perhaps claiming that $120 is a 'fair price for oil' and they see no need to bring more at this time, or just say that the 'markets are well supplied' and leave it at that.
For those paying attention, either of those responses will be the clearest and most tacit admission of Saudi limits and will be complete game-changers. 
The poorer and weaker nations and portions of society within nations will be dragged under by the additional oil price hikes leading to further calls for bailouts, aid, handouts, debt forgiveness and all the rest.  But the driving force will simply beexpensive energy. 

Scenario #2:  The ISIS rebels take Baghdad and points south. 

Everything that applies to Scenario #1 above in which the ISIS rebels control the oil/gas pipelines to the north and prevent additional petroleum gains apply here, too.  However, now the current Iraqi production of ~3.5 mbd suffers as all of the instability of a violent power shift causes oil production to falter.
Workers fearing for their families and lives leave their posts to attend to matters at home.  Populations move as refugees seek more secure locations with greater critical mass of 'their own people' and the resulting chaos and resettlement mean that critical oil field and loading terminal functions are partially or completely shut down for a period of time.
As this reality draws near the US and other allies will be forced to help protect the Shia regime in Baghdad placing the US on the same side as Iran further alienating and angering Saudi Arabia that has already expressed its disappointment in very strong terms over this issue (note the date on this next article):
Saudi Arabia, angered over Mideast, declines Security Council seat
Oct 18, 2013
(Reuters) - Saudi Arabia, in an unprecedented show of anger at the failure of the international community to end the war in Syria and act on other Middle East issues, said on Friday it would not take up its seat on the United Nations Security Council.
The kingdom condemned what it called international double standards on the Middle East and demanded reforms in the Security Council.
Riyadh's frustration is mostly directed at Washington, its oldest international ally, which has pursued policies since the Arab Spring that Saudi rulers have bitterly opposed and which have severely damaged relations with the United States, Saudi analysts have said.
Saudi Arabia has also been angered by a rapprochement between Iran, its old regional foe, and the United States, which has taken root since President Barack Obama spoke by telephone last month to the new Iranian President, Hassan Rouhani, in the highest-level contact between the two countries in more than three decades.
This new alliance between Washington and Iran contributes to Saudi Arabia's decision to not pump more oil shadowing the former OPEC blockade of the 1970's. 
Iraqi oil production is only mildly crimped under the very best case in this scenario falling to 2.5 mbd (-1.0 mbd) but almost completely shut down for a while under the worst case scenario falling to just 0.5 mbd.
Under the best case scenario with a fall of -1.0 mbd world oil prices hit $130 per barrel. 
The worst case scenario is simply a mirror of the Libyan experience where what the US thought would be a simple regime change of dumping Khadafi turned into a bloody, sectarian mess with no clear end in sight that has empowered Muslim hard liners and crushed oil production and exports.
Under this more adverse scenario, with the near complete loss of Iraqi oil production for a year or longer, we see oil at or slightly above its old high of ~$150/barrel.
The damage to the global economy at this price is profound. And the massive, intertwined global equity and credit bubbles find their pin: Pop! 
At this point the US and other allies have no choice but to go back into Iraq with boots on the ground to try and preserve the essential oil production, but the operation is, predictably, messy and not all that easy. Various players on both sides with long-standing grudges and self-interest (Russia, China, Saudi Arabia, Iran, etc) complicate matters and nothing is certain or clean.
Resolution takes years to sort things out, and by that time the US is past the peak of its 'shale oil miracle' and the world is coming to grips with the new post Peak Cheap Oil reality -- and it's a messy affair.

Scenario #3:  A wider regional conflict erupts. 

Under this scenario, the steadily-increasing pressures of dwindling resources, a millennia of contentious history, and a century of foreign meddling finally boil over.  Shiite and Sunni square off and there's not much that outside interests can do beside pick one side or the other.
It's Iran against Saudi Arabia in one sense, but it's Kurds and Christians and Shiites and Sunnis in a wider sense.  This is a regional war to settle grudges and redraw maps in ways that they should have been drawn long ago.  War is the messy, but probably inevitable, way that such things get settled.
Modern warfare and armaments are brought out and it's finally shown that shipping simply cannot be protected from modern missiles. Lloyds of London, et al., refuse to insure oil cargo ships and that alone 'shuts down' the Strait of Hormuz. No physical or military blockade is needed, just the self-interests of shipping owners and their insurers.
Suddenly, the world has 40% less daily exports of oil to work with. It's an enormous and unprecedented shock, vastly more damaging than the OPEC crisis 40 years earlier. 
For every day the conflict remains in place,  the world ticks one day closer to outright oil scarcity and depletion of above ground stocks.  The price of oil becomes a horrifying abstraction.  $150, $200, $300....higher and higher.  The prices seem fantastical and unrealistic, but the true value of oil to society s actually still 10x higher than these outrageous prices. 
Risk that had not been priced into western bond and equity markets is suddenly and viciously priced in.  Assets of every description are dumped so violently that markets are closed down by regulators. Panic sets in as nobody knows who is good for what, and counter party risk extends across institutions and sovereign states alike.
The limits of central bank omnipotence are revealed with a vengeance and all they can do is provide emergency liquidity but the pace and the scope of the unfolding re-pricing of risk is beyond their staff's capabilities (heck, even Fed staffers need to sleep) and capacity. 
People without a solid financial plan of action are frozen, caught in the fear of the moment and making terrible decisions about what to sell and when, without any idea of how to apply what cash they can raise.
After just thirty days, every major oil consuming nation invokes emergency rationing rules as price rationing alone is not doing the job.  Hoarding behaviors arise at both the national and personal levels taxing an already straining system of production and  delivery.
All non-essential travel and shipping come to a grinding halt first.  It's here that the weakness of a global just-in-time manufacturing and delivery system is exposed for many.  Without the daily air and sea movements of billions of nested component and process delivery systems manufacturers quickly eat through their lean and cost-effective inventories and entire lines of product shudder to a halt.
The resulting economic chaos is completely beyond any and all attempts to manage it.  Central planning cannot determine where to apply funds, which industries they should force to rapidly re-tool to resupply critical components that are no longer coming from overseas, but attempts are made.
Laws are passed against price gouging, hoarding, and industries are taken over by government functionaries as they attempt to micro manage solutions but the past apparent victories of central planning  were secured under entirely different circumstances and for reasons that had nothing to do with central brilliance.  They were accidental gains but the people involved at the Fed, the ECB, in DC and in Brussels mistook them as the result of real competence.
Forty years of steadily increasing debts, representing real claims on the future, are matched up against the new and vastly smaller reality in a matter of months.  Various non-essential jobs simply vanish as the heavily bloated financial industry in all of its various forms is the first to discover. 
Unemployment jumps by whole percentages, governments are forced to skinny down, and the final result is that unemployment even in the economic core countries approaches 50% just one year after the great oil shock of 2014.

Conclusion

The Iraq situation is developing rapidly but it should not be a surprise to anyone that a region loaded with desperately poor people living in a dysfunctional state have defaulted to basic tribal units and allegiances. 
The United States has a lot of culpability in this story for both for invading Iraq on the basis of obvious and proven lies about weapons of mass destruction, and then bungling the post-invasion rebuilding.
For now, we can absolutely cross off any hoped-for additional oil production from the north of Iraq as those fields will not be tapped any time soon.  That part of scenario #1 is already a done deal.
We can also begin worrying about the production and exports in the south of Iraq.  If those come off-line for any reason, oil prices will spike hard on the international stage.  Just how high depends on perceptions of how long the outage might last. Should the oil terminals and production facilities become damaged, as they have in Libya, then the world will have to discover what price of oil is high enough to kill off 3 mpd of demand.
My guess is that number is $150. Or perhaps even a bit higher.
If scenario #3 comes to pass and the Strait of Hormuz is compromised, even for a relatively short period of time - even a week would be a shock - then all of our individual preparations will be tested to the limits.
One minor response to this that I am taking is to get my oil tank filled right nowand lock in a delivery contract for the next year.  At least I might save a few bucks and enter the next heating season with a full tank.
If the Iraq conflict spreads into a regional affair, then we need to prepare for something far more serious on the world stage.  An oil supply shock and attendant price shock would be more than sufficient to tip the world economy over the edge and spark another financial crisis larger than any previously seen or experienced.
Of course, we all know that a financial crisis (or 'wealth transfer' as we call it) is coming someday, with or without an oil shock, but that scenario happens to be one that would do the trick in a hurry.
The entire tapestry of conflicts that are now spreading across the globe all fit neatly into an analysis that includes the high cost of oil as a marker for declining net energy. 
The more expensive our energy becomes, the less we will be able to do. The less we are able do, the more the people and nations on the bottom of the ladder will find themselves squeezed to the breaking point.
It's easy to explain, but hard to really grasp for most folks. The economy is an abstraction. High net energy is the real deal. Surplus energy allows all organisms to expand at a fast rate.
Humans are organisms. The economy is our fancy way of counting our growth. No more easy oil = no more easy growth. 
No more easy growth = difficult times for most and this leads to conflicts. The sorts of conflicts we are already seeing.
More profoundly considering it will impact nearly every person on the planet, a lack of growth in our money and credit system brings instability and the threat of system financial collapse.
I wish it were otherwise, but for better or worse, this is the system we happen to have now.
My readers in Europe had better be preparing for the possibility that Russia will cut off gas flows to Ukraine, which means a loss of gas flows to Europe.  The Gazprom/Ukraine gas talks are not going well, and that's quite concerning.  As that tension simmers, the rest of the world including Europe had better be figuring out what happens if Iraqi oil exports are compromised. 
And over the long haul, the whole world needs to figure out how it's going to adapt to a world where, by 2030, oil exports will effectively collapse to zero driven by a combination of falling production and rising internal demand. At this point, it looks like it won't be figuring anything out until forced to.
The world has made its choice: We are going to run headlong into declining resource issues. The sorts of conflicts we are seeing today are merely a reflection of many decades of failing to deal with certain realities in a timely or even sensible manner.
Iraq is just one more reminder of where we really are in this story. And just how vulnerable a world addicted to economic growth, but faced with a stagnant oil production reality, really is.
Again, I'd rather be a year early than a day late in my preparations. We urge you to be so, too.

~ Chris Martenson

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