Violence in Iraq threatens crucial oil reserves, may lead to price hike

Escalating violence in Iraq is threatening the development of some of the world's largest oil reserves at a time when Opec's No 2 producer was expected to be a key future supplier.

Western companies including BP, ExxonMobil and Shell, along with state-backed Chinese giants CNOOC and CNPC, have ploughed billions into the country's oil fields since 2008.

But a lightning offensive led by jihadists from the Islamic State of Iraq and the Levant (ISIL, also known as Isis) means the anticipated modernisation of Iraq's southern oil fields looks slimmer by the day.

"There's no question that outside of North America, Iraq is the country that matters the most for future production," said Antoine Halff, head of the IEA's oil markets and industry division.

So far, insurgents have forced the shutdown of Iraq's main oil refinery, but have not reached the oil fields of the south, which account for 90 per cent of exports.

Global oil prices have risen from around US$109 a barrel to nine-month highs of over US$114 a barrel on the back of the crisis. But they are nowhere near what analysts predict they could reach if Iraq stops exporting.

"In an 'ugly' scenario, where the bulk of Iraqi supply is lost, the price of Brent could easily surge to new record highs above US$140," said the London-based consultancy Capital Economics, referring to one of the oil industry's key price benchmarks.