Iraq slashes oil output amid US-Israel war with Iran, risking revenue losses

Iraq's economy faces increasing pressure as crude oil production from its southern fields has declined by approximately 70 per cent since the onset of the US-Israeli conflict with Iran. This significant reduction has substantially decreased state revenues in a country that is highly dependent on oil exports.

Iraq now produces about 1.3 million barrels of oil per day, compared to 4.3 million before the conflict, according to Reuters. Problems with tanker traffic in the Strait of Hormuz have forced Baghdad to cut back.

Iraq's oil storage tanks are full, forcing the country to reduce production.

"Crude storage has reached maximum capacity, and the remaining output after the major cut will be used to supply the country's refineries," an official from Basra Oil Company told the news agency. This state-owned company manages Iraq's southern oil exports, which account for the majority of national production.

Ahmed Haji Rasheed, a Kurdish member of Iraq's parliament, stated that the production cuts are already resulting in substantial financial losses.

"Iraq has cut production to about 1.6 million barrels per day. This means Iraq loses about $128 million based on its own oil price per barrel, but if you use the current global Brent price, the loss is much greater," Rasheed told The New Arab.

He also noted that oil exports from the Iraqi Kurdistan Region's fields continue and are being transported via the Ceyhan Port in Turkey.

Iraq was the first major oil producer to reduce output due to disruptions in tanker traffic in the Strait of Hormuz. These cuts began last week, and analysts caution that other Gulf producers may implement similar measures once their storage facilities reach capacity.

Subsequently, Kuwait and the United Arab Emirates also announced production cuts as shipping routes in the Gulf became obstructed.

Despite the reductions, Iraq continues to export oil, albeit at significantly lower volumes than before the conflict.

Reuters reported that only two tankers were loaded at Iraq's southern terminals on Sunday, each carrying approximately two million barrels. The Cospearl Lake (Hong Kong-flagged) and Yuan Hua Hu (China-flagged) both remain in the Persian Gulf, according to Marine Traffic data.

The Central Bank of Iraq announced on Sunday that the nation’s foreign currency reserves are sufficient to cover imports for approximately 12 months.

In a statement, the bank said its board convened an emergency meeting to review economic and financial developments and assess potential risks arising from regional and global changes.

The bank also stated that it is evaluating several options to ensure the payment of government salaries and essential state expenditures in the coming months, while maintaining financial stability.

The tensions in the Hormuz Strait also lead to a decline in imports to Iraq, especially foodstuffs; consequently, prices are rising steadily as people flock to supermarkets to stock up, fearing the war will last for months. 

If Iraq does not identify alternative export routes in the near future, the national economy may experience significant contraction.

Following Iran's retaliation against its oil-rich Gulf Arab neighbours, the benchmark price for a barrel of crude oil exceeded $100 for the first time since Russia's invasion of Ukraine four years ago.

Trump dismissed the price increase, a politically sensitive issue in the United States, as a "small price to pay" for eliminating the alleged threat posed by Iran's nuclear program.