For many countries, the ongoing oil price depression has brought about a new era of impending economic implosion. Yet no one seems to suffer as much as Iraq nowadays – a country with no appropriate government, battle-bled from its fight against the Islamic State and torn apart by internal conflicts. With a median age of 21 years, the challenge for Iraq as a federal state within its current borders is all the more complicated as the government has little to offer to large swaths of young people, tired of nepotism and red-tape. Iraq could mitigate risks by handing out cash – it has none, it could tap into its reserves – again, very little (some $62 billion), effectively, Baghdad’s only survival strategy is to wait and pray for better times.

Just when Iraq hoped to rebuild the country – its 2020 budget has been the largest in history and has focused on revamping the nation’s dilapidated infrastructure – external developments have cut the ambitious targets short. The massive budget was in many ways a response of the 2019 protest waves which did not subside in 2020 – ultimately, they have led to the ouster of the Abdul Mahdi-led government (who continued as a caretaker until March 02 after the Parliament-nominated replacement candidate, the US-educated Mohammed Tawfiq Allawi, failed to generate sufficient parliamentary approvals). The new candidate for the Prime Minister role, Adnan al-Zurfi, might face a similar future as getting Sunnites and Kurds onboard will inevitable be a major challenge.

Graph 1. Iraq Official Selling Prices for Europe vs Oman/Dubai Average in 2018-2020 (USD per barrel).

Source: Thomson Reuters.

After Saudi Arabia dropped its April-loading official selling prices, for many the key question was whether Iraq and Kuwait, oil exporters that routinely rely on the price signals provided by Saudi Aramco, would follow suit and embrace price cuts into crude differentials. Both did, cognizant of the risks inherent in not doing so, yet did so grudgingly for it was a price cut that went deep into the flesh of the government. Iraq dropped its Asia-bound Basrah Light OSP to a $-3.2 per barrel discount against Oman/Dubai, the lowest in years, whilst the European April price decreased by $5 per barrel to $-8.8 per barrel against Dated. With Brent prices around $20 per barrel, the prospect of selling Basrah Light to Europe for some $10 per barrel is truly disheartening (given the roughly $60 per barrel breakeven oil price). Related: $1 Oil: Saudi Arabia's Attempt To Crush U.S. Shale

Graph 2. Iraq Official Selling Prices for Europe vs Dated Brent in 2018-2020 (USD per barrel).

Source: Thomson Reuters.

While, in theory, it remains true that Iraq could partially offset all the losses incurred by the ongoing price war by ramping up production levels, yet even under OPEC+ production quotas it has more or less produced as much as it wants (in fact, Iraq was one of the most blatant transgressors of the output caps). Moreover, the oil price drop is just too big for Iraq’s economy to swallow – the 2020 draft budget was assumed to be around $135 billion, with 93 percent of government revenues coming from oil exports. The assumed annual average oil price stood at $56 per barrel in 2019. Should the Saudi-triggered differential cuts become a mainstay, Iraq now stands to garner a mere 30 percent of what it originally expected for this year. In such a case it could burn all its reserves totaling some $62 billion by the end of 2020, leaving it dependent on another IMF package.

Graph 3. Iraq’s Fiscal Breakeven Oil Price in 2005-2020 (USD per barrel).

Source: IMF, Author’s data. Related: Oil Falls To $20 On Largest Crude Build Since 2016

Now to this multitude of problems add the swift spread of coronavirus. As of April 01, Iraq has a little more than 720 confirmed cases, with some 180 recovered cases and 52 deaths. The 7 million state employees remain a burden on the shoulders of the federal government, however, life in Iraq is paralyzed and private enterprises are on the brink. Iraq’s south witnessed its first corona case relatively late (March 09) – were the pandemic to spread around Basrah, it might even endanger oil production as supplying the project sites would become much more difficult. The coronavirus threat might curb the build-up of military antagonism, rising on the back of rumors circulating in Iraq that the United States wants to increase the number of US troops in Iraq, in a way not too dissimilar to what happened to the omnipresent protests.

The emergence and rapid spreading of COVID-19 have mollified popular anger – primarily due to people being afraid to contract a highly contagious virus at a demonstration – however, has did not alleviate the complexity of all the tasks to be resolved. The Iraqi government is running monthly deficits as high as $2 billion and with very little of the nation’s crucial industrial output being in private hands, it should come as no surprise that the federal authorities could only garner less than $50 million in donations with the aim of combatting the spread of coronavirus. Iraq has closed down its borders and the government introduced a 24-hour curfew, strictly enforced by the police, substantially limiting the last remaining lifeline of urban inhabitants – informal trade.

All this complicates Baghdad’s dealings with the Kurdish administration, too. Under the November 2019 deal, the Kurdish Regional Government (KRG) committed to providing the federal state oil marketer SOMO with 250kbpd of crude in return for a 12.6 percent share of the Iraqi budget – as is oftentimes the case with Iraqi covenants, this never happened. KRG claimed that it would wait until a proper government is formed in Baghdad and from there on would start complying with the agreement – a smart tactical move, seeing in retrospect how Tawfiq Allawi failed to consolidate political allies around his candidacy. A stalemate of sorts is the end results – Baghdad does not want to push too hard not to jeopardize its Kirkuk exports that go through KRG territory, whilst Erbil is waiting to finally get a counterpart that would command at least some internal power.

By Viktor Katona for Oilprice.com

More Top Reads From Oilprice.com: