Plunging Oil Prices Hurt Iraqi Kurds' Bid for Independence

As oil prices fall, so do Kurdish hopes for an independent state in northern Iraq.
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Gas flares burn near an oil storage tank in Kirkuk, Iraq, in September 2014. The Kurds assumed control of Kirkuk's sizable oil reserves after the Islamic State overran the Iraqi army in August.


ERBIL, Iraq—The Kurdish capital is built on oil. From the high-rise apartment blocks that ring the broad outer boulevards, to the streetside jungle gyms and gleaming Dodge Chargers driven by local police, almost everything in Erbil is derived from the region's energy riches.

Until recently, this oil and gas bonanza seemed like the final piece in the Kurds' long-standing bid to carve out their own state in northern Iraq. While the rest of the country leaped from one outbreak of violence to another after the toppling of dictator Saddam Hussein in 2003, the three self-governing Kurdish provinces reeled in foreign firms to tap their natural resources and used the proceeds to build the infrastructure of a prospective nation.

The 40 percent drop in oil prices since June appears, however, to have thrown a wrench into the economic plans of the Kurdistan Regional Government (KRG). Almost all (96 percent) of its revenues came from oil and gas in 2013, and as the KRG's financial calculus has gone awry, many politicians sound less bullish in their talk of immediate independence.

"Their confidence had soared over the previous year. The numbers were starting to look pretty good, and it was enough to look forward to 2015, when there'd be some excess oil-exporting capacity. But then the price of oil fell, and just kept falling," said Patrick Osgood, Kurdistan bureau chief for the industry publication Iraq Oil Report. (See related story: "The Kurds May Seize the Moment to Break Free of Iraq.")

Changes in the KRG's rhetoric, he said, "could almost be plotted against an oil price graph."

Slow March Toward Independence

Even before oil prices began to tumble, after five years of exceeding $100 per barrel, Kurdish independence was far from a sure thing.

The summer successes of the Islamic State jihadist group (also known as ISIS or ISIL), with whom the Kurds now share a several-hundred-mile-long border, brought home the fragility of the Kurds' position. Continuing opposition from the neighboring governments of Turkey and Iran, which fear Iraqi Kurdish independence could embolden their own Kurdish minorities, raises questions as to whether surrounding countries would accept the landlocked, mostly mountainous territory becoming a separate country. (See related stories: "Iraq: 1,200 Years of Turbulent History in Five Maps" and "Iraq Crisis: 'Ancient Hatreds Turning Into Modern Realities.'")

"I think what ISIS and the oil price demonstrated is that the KRG is not ready for independence. It doesn't have an economy, it has a distribution system. That's symptomatic of a failed state, not of a rising state," said Bilal Wahab, an energy expert and lecturer at the American University in Sulaymaniyah, Iraq.

Kurdish leaders aren't blind to the economy's deficiencies. Spurred by the tumbling energy market and continuing regional flux, Erbil and Baghdad cut an oil deal earlier this month after the federal government had shut off the Kurds' portion of the budget for independently exporting oil through Turkey.

Baghdad claimed this portion violated previous agreements, so now, in exchange for 17 percent of the budget, the KRG will sell 300,000 barrels per day of its own oil and 250,000 barrels per day from the disputed Kirkuk fields through the Iraqi state marketing organization. Kirkuk is highly prized in both capitals. Its sizable oil reserves are a tremendous boon to the Kurds, who assumed control in the city and the surrounding area after the Islamic State overran the Iraqi army in August.

Even under this arrangement, low oil prices of about $60 per barrel will still affect the Kurds, because cheap oil will reduce Iraq's overall budget.

But by hitching its fortunes to those of Iraq, the KRG will get to enjoy some of the bounty provided by the southern Iraqi oil fields' much superior production volume.

Still 90 Percent in Favor

In the meantime, however, the Kurds are working toward oil self-sufficiency at a speed that suggests this deal might be temporary. Two big oil fields near Erbil, with an additional yield of 160,000 to 180,000 barrels per day through 2015, are expected to come online soon. The Kirkuk fields continue to add to the Kurds' exporting capacity.

There are still questions as to whether some oil firms might reduce their high-risk exploration if oil prices remain low for an extended period. Yet the relatively low cost of producing in Kurdistan suggests the government's ambitious target of one million barrels per day by 2016 remains achievable.

Whatever happens in the oil market, however, remains immaterial to most Kurds. Polling suggests at least 90 percent of eligible voters favor breaking away in the near future. Safeen Dizayee, the KRG's chief spokesman, acknowledges that the emotional appeal of independence trumps practical considerations. (See related story: "What Does It Mean to Be Iraqi Anymore?")

"The issue of independence is still on the agenda. I don't think any responsible leader would say he's against it. It would be political suicide," he said. "But we're pragmatic."

The story is part of a special series that explores energy issues. For more, visit The Great Energy Challenge.

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