For many observers, the answer lies in Iraq, which globally and specifically within OPEC has the world's most ambitious plans to expand oil production in the coming years, most experts say. It is the single most influential factor, and the most uncertain, even if oil prices will also be determined by what happens in other countries, both in OPEC and beyond, as well as how the global economic recovery evolves.
There is little question Iraq will one day reach its potential to triple current output of slightly under 3 million barrels per day (bpd), which according to the country’s latest goals would happen by 2020 and then be sustained at that level for 20 years. The International Energy Agency's middle estimate is 6.1 million bpd by 2020. But in private, governments and companies are more pessimistic because they incorporate geopolitical and internal political factors in their expectations, such as what will happen if the Shi’ite–Sunni strife worsens, or if Syria atomizes into several territories, or if Iran's nuclear quagmire is prolonged for years.
The dominant—yet little discussed—conclusion among oil insiders and governments is that significant North American oil gains will offset politically-driven delays in OPEC members, mainly Iraq, which will be unable to pump as much as they would want.
"Concerns over Iraq are justified. I’ve always been pessimistic because of sectarian strife. It's quite likely it's not going to get close to the targets its talking about," said Paul Stevens, a senior energy analyst at Chatham House, a London-based think tank. "So the Gulf Cooperation Council will be delighted from an oil market point of view."
"Iraq is short on everything: on know-how, water, power, infrastructure, investment, and manpower, and that's unlikely to change until the political situation sorts itself out, because the oil industry potential is conditional to that," Dr. Stevens said. Politically-driven delays assume a more realistic production ceiling for Iraq of around 5 million bpd by 2020. But the uncertainty over the equivalent 4 million bpd difference with the official target is a game-changing cliffhanger that could swing oil prices.
"Without strife this would be something to worry about, but given that strife is likely to continue, the situation looks good for next few years. There is no immediate need for OPEC to worry about an oil price collapse," said Herman Franssen, executive director of the New York-based Energy Intelligence Group, senior fellow and Middle East energy expert in the Center for Strategic and International Studies and a former chief economist of the International Energy Agency (IEA). "Most companies are looking at USD 100 and USD 120 for Brent. Nobody at this point foresees a collapse of prices and nobody foresees a breakthrough of USD 120. It’s a Goldilocks scenario, not too bad and not too good," Dr. Franssen said.
Without even considering the country's recently confirmed untapped oil reserves, the existing giant fields in the south and Kirkuk are enough to seriously alter oil markets. In fact, when Baghdad told its OPEC partners in December 2012 that it was targeting 3.7 million bpd by 2013, a nearly 30 percent increase, concern simmered.
With the right infrastructure, investment and political stability—that is, if all the stars were aligned—prices would collapse. But they will not collapse—not for the next three or four years anyway, and perhaps not even this decade. The factors that have weighed down the country not only remain unresolved, but in fact have worsened.
Iraq is still targeting 4.5 million bpd by 2014, although it is in the process of revising its official, outdated 12 million bpd by 2017 target, which very few ever thought was possible to begin with. The ministries of oil, electricity, planning, mining and industry, the environment, and finance, with the help of the World Bank and US consultants Booz & Co., have drafted the Integrated National Energy Strategy —reportedly with a 9 million bpd by 2020 goal, over 180 percent more than the current 3.2 million bpd output.
"The new goals look optimistic, even without civil strife," Dr. Franssen said. "Everything is going much slower. Even the IEA has been on the optimistic side."
After two solid years of gains, pessimism over Iraq has settled this year as political and geopolitical risks pick up. Iraq's track record is also part of the problem. It is realistically impossible for it to reach its own goal of exporting 2.9 million bpd average this year, yet it insists it will. In July, it barely hit 2.3 million bpd as a result of infrastructure constraints in the south and sectarian violence in the north. Moreover, planned maintenance and works starting in September in southern export facilities are predicted to further cut 500,000 bpd this year, although Iraqi officials deny this.
Going forward, Iraq's real output is more uncertain. It will almost certainly miss the 2013 target: in fact, its output will likely fall for the first time in years. It will fall short of its targets again in 2014 and likely approach the 4 million bpd mark, and by the end of 2020 it will pump around 5 million bpd, according to a combination of experts and oil markets analysts.
In the Shi’ite-controlled south the problem is not security, but infrastructure bottlenecks, from water and power, to storage capacity, drilling rigs and manpower. These, of course, are surmountable issues, simply not in the ideal timeframe Baghdad wants, especially as insecurity in the country worsens.
The biggest holdup for Iraq is in the north, especially in the disputed Kirkuk fields. In July, the pipeline to Turkey transported some 180,000 bpd, down from 193,000 in June, but it has a capacity of 1.6 million bpd. The aging pipeline does suffer from lack of investment, but most of the problem is that it is routinely attacked with explosives. A new pipeline is planned, but that cannot address the insecurity and sectarian divisions.
Another mostly untapped source is exports from the autonomous Kurdistan Region in the north. It trucks some of its supplies to Turkey, but it could add 250,000 bpd and more, according to the Kurdish Regional Government (KRG). But the KRG and Baghdad have failed to agree on export terms since the fall of Saddam Hussein, and given the current sectarian tension, it is unlikely they will any time soon.
Iraq's sectarian violence has been increasing for some time, and in recent months reached levels not seen since 2007, at the peak of the war between Al-Qaeda, sectarian militias and US forces. While few now expect a fully-fledged civil war, it is clear that the current Shi’ite-led government is struggling to keep the peace in the country effectively divided into three parts, with Sunnis in the west and Kurds in the north.
Perhaps the biggest single biggest destabilizing factor is the neighboring civil war in Syria, where Syrian Sunnis have made a common front with Iraqi Sunnis in a sectarian war against their Shi’ite-dominated governments. Concern is also growing that Iraqi Kurds’ independence aspirations will be strengthened by the ranks of hardened militants in Syria and Turkey.
"The civil strife is difficult to project. Nobody was expecting for things to deteriorate. I think a lot is aggravated by what's happening in Syria and that is likely to continue as long as we can foresee," Dr. Franssen said.
This heightened risk is naturally contained by multiple multinational efforts, but there is still massive uncertainty. Few expected the Syrian war to last as long as it has, or the Russian and Iranian support that has overwhelmed Syria's opposition. Western concerns over the growing power of extremist factions in Syria have also shifted the equation. And there are certainly plenty more surprises to come: that is precisely the nature of war.
The reality is not factored into official Iraqi targets and bullish independent projections, as war preparations illustrate. "It is government crude for Sunni blood," Abu Ammar, a Sunni tribal leader, told Reuters recently. "The Baghdad government should understand this message: stop spilling our blood and we'll stop attacking the oil pipeline."
OPEC must anticipate stability
Sooner or later, Iraq will stabilize and Iran's nuclear standoff will end, which means OPEC will eventually have to deal with oversupplied markets. It must plan accordingly. Tight oil output will contribute 2.4 million bpd by 2020, similar to the output of Norway or Venezuela, and also to Iran’s exports before sanctions took hold. Natural gas production is also surging, and the US, which last decade built gas import infrastructure, is now expected to become a net exporter.
Furthermore, OPEC political instability will eventually subside and boost production in Nigeria, Libya, and even Venezuela, while non-OPEC will continue increasing in regions like Brazil. Global demand will also increase, but the oil production upside potential—excluding politics—is more robust.
"There is a scenario in the middle- to long-term in which Iraq will have reached 5 to 6 million bpd, Iran will be back to 4 and 5 million bpd, and the US could reach 4 or 5 million bpd in crude oil output, and even more is coming on line, like in Brazil with 2 million bpd more," said Manouchehr Takin, senior petroleum upstream analyst in the Centre for Global Energy Studies.
"The factor of security in Iraq is there, but I don’t think that it has affected that much: perhaps a 20 percent slowdown. When you put all of this together, oil production is going up. Overall, in next 5 years there will be more supply, and demand will not increase so much, so there will be bearish pressure, although the next two years will be all right because of Iran sanctions," Dr. Takin said.