Tags: Black Swan | Iraq | Syria | oil

The Black Swan Strikes in Iraq?

Thursday, 02 May 2013 07:51 AM

By Jacob Wolinsky

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After the financial crisis, it became a favorite hobby of pundits to try to figure out what the next Black Swan event would be. Since Black Swans are impossible to predict, this is a total waste of time. However, pundits still continue their guessing game.

Some are predicting Slovenia could cause as Cyprus style crisis again. The truth is that just as Cyprus was totally off the radar, the next Black Swan will be also.

But there is one hot spot where there has been much political focus but less on the economic consequences — Iraq.

Iraq is vital as the No. 7 oil producer (but nearly tied with No. 4 Iran).

Iraq is an ethnic/sectarian mess. Without getting too much into the politics, in the past two weeks there has been a surge in sectarian violence that is threatening to intensify as frustration in Iraq's Sunni community boils over. There is fear that there could be another civil war (this time without the United States being able to stop it).

Citigroup is out with a new report in which they estimate that in a worst-case scenario, 50 percent of Iraq's oil would be shut down. They note that the majority of Iraq's oil is produced in the south where there has been little violence lately. However, Citi fails to note that in the prior conflict in 2006, much of the violence took place in the oil-rich areas. Furthermore, without getting further into the geopolitics, there is reason to believe that with the war in Syria there would be more spillover of fighters joining up with tribes in the north to attack Shias in the south.

The situation in Iraq is grave both for the local economy and for the global economy. Even a partial shutdown of Iraqi oil exports would be a disaster for the economy. Citi states, "revenues from oil sales account for 95 percent of the federal government's earnings, 98 percent of exports and almost 80 percent of economic activity."

For the global economy, not only would a shutdown of Iraqi oil limit supplies, but it would also drive up the price of oil, as investors would fear a spillover to other oil-rich countries in the region. Although a potential Israeli strike on Iran is frequently cited as a reason for moves in the oil market, Iraq exports almost as much oil as Iran. Additionally, while no one knows if Israel will attack Iran (or whether it would impact oil production), there is already a conflict ongoing in Iraq and it could well escalate out of control. There is no force or country that would have the will to intervene in such a scenario.

While the future is impossible to predict, anyone who watches commodities (or drives a car) may want to keep an eye on Iraq.

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