Economic repercussions of war in Iraq

Oil, whether we like it or not, remains a primary fuel for economic growth and sustainability. It is disquieting but hardly surprising that concerns about Iraq heading towards civil war, despite the country’s main oil fields currently being unaffected, have already created shockwaves across the global economy and pushed the oil price to nine months highs.

Why so? Iraq is the world’s eighth-largest oil producer and the second-largest producer in the Organisation of the Petroleum Exporting Countries behind Saudi Arabia.

Its long-term importance for the global energy market cannot be understated.

According to the International Energy Agency, Iraq will be responsible for around 60% of the growth in OPEC’s production of crude oil in the remainder of this decade.

As Sunni-led rebel fighters advance on towns in the north and east of Iraq, it is not yet the case that the violence poses a direct risk to the main oil supplies in the south or to long-term oil investors.

However, sentiment rules

the

markets. Market volatility is a natural consequence of the uncertain political and military horizons.

A key worry is that the Sunni militants could advance southwards towards the Shiite controlled Baghdad and the main oil fields. Iran has already offered help to its fellow Shiites in government, prompting speculation that the chaos could spiral across the Middle East.

On Thursday, U.S. President Barack Obama pledged to consider “all options” including air strikes. On Friday, however, he indicated that the US will not take any immediate military action to assist the Iraqi army against the militants.

Obama’s comments were too late to calm the markets. Brent crude reached 114.69 dollars on Friday due to the possibility of a reduced supply, marking its highest point since September 2013 and its single largest weekly gain so far this year.

Shares in the U.S. were also down on Thursday, despite otherwise solid data pointing to a recovery.

The fuel-dependent aviation industry too took a hit, with the International Airlines Group closing the week almost 10% down at 379p.

The U.S. will likely wait and watch for several days before taking military action, given investors no real choice but to do the same. Should the situation calm, so too will the financial markets. Should too will market volatility.

The closer to reality the threat to oil supply and production edges, the higher the oil prices and the lower the stock prices we can expect to see in the coming weeks.

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