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Declining oil prices could strain
Baghdad-Erbil relations further
10.8.2011
By Shwan Zulal - ekurd.net |
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August 10, 2011
Oil prices are falling and set to go even lower as
the global uncertainty over EU debt crises and US
downgrade continues. It is hard to predict oil
prices in the coming six month, but it is becoming
clear that the global economy is not able to sustain
$100 US$ plus price for very long.
It is somewhat good news for the developed and
developing economies like the US and China and BRIC
countries as it will contribute to their efforts in
taming inflation. Nevertheless, it will have a
negative impact on the oil producing nations like
Iraq.
After decades of war, Iraq and Kurdistan Region are
recovering and the production of oil has finally
been boosted and large part of 2011 budget, in tune
of $25 Billion has been allocated for much-needed
investments in the infrastructure.
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However, the downward
spiral of oil prices are set to wipe out all the
extra production capacity -in terms of revenue-the
KRG (Kurdistan Regional Government) and Iraq federal
government have been working on.
Iraq depends on oil for over 90 per cent of its
national income and the federal government budget.
Last week oil prices fell by 10 per cent and Monday
the prices have fallen over 4 per cent so far.
Considering that, Kurdistan Region's share of the
federal Iraqi budget is 17 per cent and 90 per cent
of that is oil based, it becomes clear that the
Iraqi budget will take a big knock. As a
consequence; projects and contracts which has been
awarded part of the investment programs may be
affected.
The implication beyond the budgets shortcomings and
cutting back on spending would be that the fragile
Iraqi PM, Nuri Al-Maliki's government would come
under more pressure from the public and the
political blocs while the cuts bite in to the
already meagre public services.
As the Iraqi Budget decreases, the issue of the
revenue sharing and budget share of Kurdistan Region
may come to the forefront of the political agenda
once again. Although this issue has been very
contentious in the past - in par with the legality
of the oil contracts and Article 140- the rising oil
prices and an increase in Iraqi production capacity
contributing to higher revenue has made the
disagreements less of an issue. However, once the
budget come under pressure due to lower oil prices,www.ekurd.netthe
issue could flare again and add to the already
strained relationship between Baghdad and Erbil over
the oil contracts and Article 140 of the Iraqi
constitution (determining the future of the disputed
territories).
This latest declines in oil prices and market
turmoil is a reminder for the KRG, and the Iraqi
Government, that relaying on oil revenue alone,
would make the country very vulnerable to oil price
fluctuations.
The last Iraqi Budget approved last February was
estimated at $82.6 billion based on average of
$76.50 per barrel. It is needless to say that crude
prices are still above the estimated price and
capacity has increased in the last six month since
the budget was passed. However, October oil future
contracts are already down to mid $70 range and more
declines are possible as the global economic
uncertainty continues.
Shwan Zulal
is a Kurdish Blogger, a regular contributing writer
for ekurd.net, interested in political and legal
Reform in Kurdistan, KRG, Iraq and current Kurdish
affairs, including oil exploration companies and
relevant legislations. You may visit Zulal's website
at http://kurdishviews.blogspot.com/
Copyright © 2011 ekurd.net
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