Iraq: Stuck in the Middle with You

Amid the endless stream of news we receive from Iraq, far too little seems to involve the country's crucial role in the world of energy.

Iraq holds a long-standing and strategically important position in oil and gas, since international giants BP (NYSE: BP  ) and Royal Dutch Shell (NYSE: RDS-A  ) (NYSE: RDS-B  ) began operating there decades ago. The nation sits in a vital location, with Saudi Arabia to its south, Iran to its east, and Syria and Turkey to its north. Its lower flank straddles the Persian Gulf, making it reasonably accessible to Bahrain and Qatar.

From a purely numerical perspective, Iraq currently produces about 1.9 million barrels of oil on good days, roughly 25% less than its prewar rate. Indeed, as The Wall Street Journal noted last month, thefts of crude from pipelines in and around its northern fields have essentially crippled production in that area, a phenomenon that has prompted a U.S. Army artillery battalion to maintain pipeline security in the area around Kirkuk. Nevertheless, that area is producing only about 180,000 barrels a day, compared to a rated capacity closer to 600,000 daily barrels.

With oil wells ranging from north to south throughout most of the nation, Iraq probably has about 115 billion barrels of proved reserves. Among OPEC nations, that's less than half of Saudi Arabia's 264 billion barrels, and about 85% of Iran's 136 billion barrels. But it's almost half Venezuela's level, and more than three times Nigeria's complement.

In our world of tight balances between crude oil's supply and demand, it seems to me that, politics aside, the United States must treat Iraq and its entire energy-rich region very carefully. The status quo there is unacceptable to many observers, but any further decline in its status could threaten not only Iraq's oil production, but that of Saudi Arabia and Iran as well. That's roughly half of OPEC's daily output at stake.

In the years ahead, I believe easy answers about the global energy market will be ever harder to find. That's why I'd continue to urge Fools to save a place in their portfolios for major, geographically diverse oil producers, including ExxonMobil (NYSE: XOM  ) , ConocoPhillips (NYSE: COP  ) , Chevron (NYSE: CVX  ) , or BP.

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Fool contributor David Lee Smith does not own shares in any of the companies mentioned. He welcomes your questions or comments. The Fool has a disclosure policy.


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