Sunni militants this week seized two cities—Mosul and Tikrit—and threatened to march on the capital of Baghdad while vowing to take over two other cities spiritually important to Shiite Muslims. In the northern oil hub of Kirkuk Thursday, Kurdish military units, or Pershmerga, assumed control of key government installations when Iraqi Army forces abandoned their posts.
"This is a huge regional threat and the collapse of the Iraqi Army shows the mistakes of the Maliki government in terms of the country and obviously the fact everybody now is going to scramble. This is unexpected," said Daniel Yergin, vice chairman of IHS.
Iraq produces about 3.3 million barrels a day, and so far the only reported disruption is the flow of oil through the 600,000 barrel Kirkuk-Ceyhan pipeline, which runs from Kirkuk to Turkey. The Kirkuk fields produce about 400,000 to 500,000 barrels a day, while the major fields in the Basra area produce about 2.6 to 2.7 million barrels a day, according to IHS.
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"If it spreads to the south or threatens the south, I think the anxiety is going to be reflected in the oil market. Absolutely," said Yergin. "The recovery of Iraq was kind of key to the future of the world oil market."
According to IHS, Iraq is one of the largest sources of growth for the global oil market going into the future. U.S. oil production is more than double Iraq's, but it is expected to plateau by early to mid 2020s, while Iraq has the potential to add about 200,000 a year into 2040.
Although OPEC is producing 30 million barrels a day, supply disruptions in other parts of the world make Iraq's growing production all the more important. Increasing U.S. oil production also has helped offset the loss of oil from places like Iran and Libya, and it has risen to 8.5 million barrels a day, up 1.2 million barrels in just the last year.