Iraq, Saudi Arabia and Oil: Risk Factors

Abstract

As two oil-rich states and significant members of OPEC, Iraq is in the grip of a devastating conflict and Saudi Arabia is confronted with a serious legitimacy crisis. They both face much uncertainty over the next few years, although from different sources and in different degrees. The world has been able to cope with Iraq being an erratic oil producer since 1991, with its production at times falling to negligible amounts. Saudi Arabia, however, has been towards the other end of the spectrum during the same period. It has been OPEC's largest and most stable pro-Western producer with a capacity to increase production whenever necessitated either to meet demand for more oil or to moderate oil prices to the extent required to maintain stability in the world market and economy. This can no longer be taken for granted. While international demand and oil prices have risen amid uncertainties about Iraq, sustained threat from international terrorism, technical problems such as the limited availability of shipping and accidental supply disruptions, soaring demand for energy in East Asia, and the incapacity of Russia to increase production, the Saudi political and security environment has correspondingly become a major source of growing concern. If this concern is not alleviated, the Iraqi situation is not stabilised and alternative sources are not found, the international oil market is likely to remain volatile. Oil prices at around $40-45 per barrel over the next three years are a possibility.