As Iraq's government teeters before Isis insurgents, the Kurds now control the oil hub of Kirkuk – and have national ambitions

Iraqis in Baghdad and the country's south are already calling the events of the past two weeks "the catastrophe". Not so inhabitants of the would-be Iraqi Kurdish capital of Irbil, where joy is unrestrained and a long-held sense of destiny is ever closer to being realised.

As the central government teeters under the insurgent onslaught, the fate of Irbil appears more assured than ever. Kurdish politicians, in the past not shy to criticise Arab Iraqi leaders, but coy about their national ambitions, are now openly touting "a new reality".

To Kurdish officials and locals alike, a tectonic shift in the balance of power between Iraq's two power bases, and peoples, has taken place. And Kirkuk, the bitterly contested oil hub, is at the epicentre.

In the heady days following the fall of Mosul and Tikrit, the Kurdish Peshmurga forces crossed into Kirkuk to head off the fast advancing jihadist group Isis. The Iraqi army, meanwhile, was fast retreating south, abandoning in hours a city that had been at the heart of the dispute between the Kurds and the Arabs for more than 70 years.

For the Kurds, the army's stunning capitulation has now settled the matter for good.

"Kirkuk will finally produce oil for the Kurds," said Muhama Khalil, the Kurdish head of the economic committee in Iraq's national parliament. "For 70 years oil has been used to buy weapons to kill us. Finally we have our own oil and it will only be for the Kurds."

The significance of Kirkuk changing hands sits uncomfortably with Iraqis in Baghdad. Many express shame at the Iraqi military's collapse. Others blame the rout on a conspiracy concocted between generals and Kurdish leaders and involving vast amounts of cash. Whatever the cause, most hold little hope that the city will return to Iraqi control anytime soon.

And nor do they believe the fast crumbling state can assert its control over oilfields that the Kurds have long coveted.

The Kurdish leader, Massoud Barzani, helped stoke those fears this week, with his most outspoken comments yet since Isis launched its headlong offensive. "Iraq is obviously falling apart," he told CNN. "We did not cause the collapse of Iraq. It is others who did. And we cannot remain hostages for the unknown."

Pressed on whether Iraqi Kurds would seek to push for their 'holy grail' of independence, Barzani added: "The time is here for the Kurdistan people to determine their future and the decision of the people is what we are going to uphold."

Barzani has long calculated that having a state in all but name has served both his and the Kurdish peoples' interests. His role as leader of Iraq's Kurds has also made him one of several defacto leaders of the 40 million strong Kurdish population, scattered between northern Iraq, eastern Syria, south-eastern Turkey, and western Iran, all of whom seem happy enough with Kurdish autonomy, but – Turkey especially – would feel gravely threatened by a proclamation of statehood.

The fate of the Kurds, who were denied a state when the Middle East was carved up almost a century ago, has greatly influenced the region ever since and their steady consolidation in northern Iraq has been watched by neighbouring states with keen interest.

The Kurds had employed a dual strategy of forging close strategic ties with Turkey, while relentlessly testing their boundaries with Baghdad, which has vehemently tried to retain control of the northern oilfields and, in return, given Irbil 17.5% of national budget revenues.

Now though, Kurdish officials and locals alike appear more tempted than ever before to make a direct play for Kirkuk's oilfields and to consolidate their grip on the disputed territories to the south of the city, which were also abandoned by the Iraqi army. Baghdad had twice pledged it would hold a referendum on the territories, which would enable residents of the area to vote on their allegiance.

Saddam Hussein had enticed Arabs to the area from the early 1970s in a bid to shift the fragile demographics. Since Baghdad fell 11 years ago, Kurds have returned to the area and Kurdish officials believe the territories would return to them if a referendum was held now.

Such is the new power base, however, that holding a plebicite now seems redundant.

"People in Kirkuk and Singar should be the decision makers about their destiny," said Khalil. "Now we are applying this right. The people in Kirkuk called for our help after the Iraqi Army fled. Now we are not leaving until they hold a referendum."

Safeen Dizayee, Kurdistan regional government (KRG) spokesman, was at pains on Wednesday to highlight the region's resources. "In the governorates under KRG administration, vast quantities of natural resources have been discovered over the last few years – estimates point to more than 45bn barrels of oil and significant quantities of natural gas.

"The Kurdistan region has already landed on the global energy map. Regarding the so-called disputed territories, Peshmerga forces have entered these areas after the Iraqi army abandoned their positions. The KRG had and still has an obligation to protect civilians in these areas and to ensure that army bases, cities, and land areas do not fall into the hands of terrorists."

Aref Maroof, 52, a Kirkuk school inspector, said: "I think 85-90% of Kurds want independence. Kurdistan has two options; one is to declare independence without 'separated territories' [disputed territories] in which case it will fail, or to declare independence by including the 'separated territories' in which case the Kurds will face a war with [Nouri al-]Maliki.

"It is in the interest of Kurds (to do so) if the central government and its army is weak. (But) If the KRG assists Iraq ... to rebuild their army, it is like committing suicide."

In Baghdad, a sense of gloom pervades many in government who see little chance of shifting the Kurds from Kirkuk, or even defending their interests while an insurgency and political crisis rages.

"They are getting what they want," said one minister. "While Baghdad burns, and while we all sit back and watch the fire."