Plunging oil prices below $70 threatens Iraq's economic stability

Shafaq News/ Iraq's economy, heavily reliant on oil revenues, is facing mounting pressure as global oil prices continue to decline, experts have warned. With crude prices dipping below the $70 per barrel mark, the country's investment and operational budgets are at risk, potentially impacting a wide range of sectors.

"The decline in global oil prices below $70 per barrel will directly impact the investment and operational budgets for commodities and services and the overall economic movement in the country," said Mustafa Hantoush, an economic and financial expert. "However, salaries are the last thing that will be affected, as Iraq can pay salaries for at least three years."

Hantoush explained that various factors, including the production levels of major oil-producing nations like the United States and the demand from key consumers such as Europe, influence the global oil market. He noted that the US, both a producer and consumer of oil, is generally comfortable with prices between $50 and $70 per barrel, as this range is profitable for its domestic oil companies.

"European partners of the United States are currently suffering from high fuel, oil, and gas prices," Hantoush added. "Europe is a key partner for the United States, which is why the latter seeks to stabilize oil prices below $80 per barrel."

Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, aim for higher prices, believing that a range of $75 to $80 per barrel is fair.

Several factors contribute to the current decline in oil prices, including slowing global economic growth, the increasing adoption of renewable energy sources, and the oversupply of oil in the market, particularly from Russia.

"The Russo-Ukrainian war is nearing its end, and with no growth in the global economy and inflation on the rise, these factors all contribute to the decline in oil prices below $70 per barrel," Hantoush told Shafaq News.

While Iraq may be able to sustain its public sector salaries for several years, the decline in oil revenues could significantly impact the country's investment plans. Hantoush warned that some projects may be delayed or canceled, similar to previous periods of low oil prices.

"The biggest concern remains the need to open up domestic investments in industry, agriculture, tourism, transportation, and the external economy," he concluded. "To reduce reliance on oil revenues, Iraq must focus on diversifying its economy and achieving self-sufficiency in areas such as electricity."

Basim al-Gharibawi, a member of the Iraqi parliament's oil and gas committee, confirmed that OPEC has requested member countries to reduce their output to support prices. However, he noted that while this may affect the government's ability to cover budget deficits, it should not impact the funds allocated in the 2023 budget.

Iraqi lawmaker and member of the Parliamentary Finance Committee, Mustafa al-Karaawi, stated that "the budget is built 90% on oil revenues. Any fluctuation in oil prices will have a direct impact on the budget. Therefore, if global oil prices drop, there will be a deficit in implementing the budget."

Speaking to Shafaq News Agency, al-Karaawi emphasized that "salaries will not be affected, as the salary cap is significantly lower than the ceiling set in the budget. However, the investment budget and the operational budget, particularly in terms of goods and services, will be directly impacted based on the priorities set by the government. The country's overall economic activity may also be affected, but salaries will be the last to face repercussions."

Regarding the pricing mechanism for Iraqi oil, Ministry of Oil spokesperson Assem Jihad explained that "before the end of each month, the ministry's teams convene to assess market developments. Based on these assessments, Iraqi oil prices are set according to their type, density, and target markets. This pricing is done monthly, not daily. Oil marketing contracts with international companies are then concluded following this mechanism."

Jihad further told Shafaq News Agency that "market developments, positive or negative, do not affect Iraq alone but other oil-producing countries and the global oil market, which is constantly exposed to geopolitical, economic, health, and security challenges that influence oil prices."

He added, "However, the OPEC+ agreement aims to balance and stabilize global oil markets. OPEC+ has worked to address numerous challenges and difficult conditions facing the global oil markets by taking collective measures to restore the vitality of the oil market."