Shafaq News
The intensifying confrontation between the
United States and Iran is rapidly transforming from a military showdown into a
strategic economic test for Iraq, whose oil-dependent economy sits directly in
the path of the region’s energy disruptions.
Ten days after hostilities erupted between
Washington and Tel Aviv on one side and Tehran on the other, Baghdad is
attempting to remain officially outside the battlefield. Yet the war is already
reverberating through Iraq’s economic arteries. Turbulence in global energy
markets, rising insurance costs for shipping, and disruptions to navigation in
the Strait of Hormuz threaten the country’s ability to sustain the oil exports
that generate more than 90 percent of state revenues.
For Iraq, the stakes go beyond market
volatility. The country exports the majority of its crude through Gulf routes
tied to Hormuz —one of the world’s most critical energy corridors. Roughly 20
million barrels of oil per day, nearly 20 percent of global supply, pass
through the strait’s narrow 21-mile navigable channel, making any disruption
there an immediate risk to Iraq’s fiscal stability.
Baghdad has so far pursued a cautious political
posture, avoiding direct involvement in the war while attempting to shield its
economy from the fallout. But the structure of Iraq’s energy sector leaves
little room for insulation.
Read more: Iraq braces for financial meltdown amid Hormuz closing threats
Political science professor Issam Al-Feyli of
Al-Mustansiriya University told Shafaq News that the trajectory of the conflict
points toward deeper escalation, arguing that hardened positions in Washington
and Tehran leave limited room for a quick diplomatic exit.
According to Al-Feyli, Iran has rejected
conditions proposed by the United States to halt the war, while Washington
appears determined to continue military pressure until it achieves strategic
objectives inside Iran —either weakening the current political system or
reshaping the country’s political landscape in line with US interests.
Such a trajectory raises the possibility that
regional actors could be drawn into the confrontation. Armed factions in Iraq
and Lebanon’s Hezbollah could intensify their involvement, he warned, “widening
the conflict and complicating efforts to contain it.”
For Baghdad, the risk is security escalation but
also economic paralysis if the Gulf energy corridor becomes unstable. Early
signs of disruption have already emerged inside Iraq’s oil industry.
Field reports indicate that several foreign oil
companies have begun evacuating staff from oil fields in Basra toward Kuwait,
citing security concerns. Iraqi officials also reported that production has
effectively halted at the giant Rumaila field and several fields in the Kurdistan
Region, leading to daily losses estimated at 1.6 million barrels of oil.
The shutdown reflects growing uncertainty about
the safety of export routes and the operational risks facing international
companies working in southern Iraq.
The Eco Iraq Observatory estimates that the halt
in production at Rumaila and fields in the Kurdistan Region is already costing
the country around $128 million per day, placing additional strain on public
finances that rely overwhelmingly on oil revenues.
These disruptions are unfolding as global energy
markets enter a period of extreme volatility.
Economist and energy researcher Ahmed Eid said
the war has pushed oil markets into a phase of “volatility and uncertainty,”
driven largely by fears surrounding the Strait of Hormuz.
Threats to navigation in the Gulf have increased
shipping costs and maritime insurance premiums, creating bottlenecks in energy
flows and unsettling international markets.
Market data suggest that just one week of
disruptions in Hormuz could withhold around 140 million barrels of oil from
global markets, tightening supply and accelerating price increases.
As a result, oil prices climbed around 25%, the
highest since mid-2022. Brent crude surpassed $119 per barrel. Regional energy
companies —including Kuwait Petroleum Corporation and QatarEnergy — have
declared force majeure, signaling the severity of logistical disruptions.
Some Iranian parliamentary projections suggest
that if the crisis persists, oil prices could surge to between $150 and $200
per barrel, levels that could reshape global energy markets and dramatically
alter the fiscal outlook for oil-producing states.
For Iraq, higher prices offer both opportunity
and risk.
Iraqi caretaker Prime Minister’s financial and
economic adviser Mudhhir Mohammed Salih outlined the government’s calculations
as it navigates the unfolding crisis.
Salih told Shafaq News that Iraq may need to
implement precautionary shutdowns at certain oil fields if exports through the
Strait of Hormuz become impossible.
Such a scenario could reduce Iraq’s production
capacity by 50 to 60 percent, equivalent to roughly 1.5 to 2 million barrels
per day.
However, the surge in global oil prices could
offset part of those losses through what economists describe as the “opportunity
cost” effect, where reduced output is compensated by significantly higher
prices.
“The full financial impact of a prolonged
closure of the Strait may only become clear after about 60 days,” Salih
explained.
The government is therefore exploring
alternative export routes to maintain oil flows if Gulf shipping routes
deteriorate.
One option involves expanding shipments through
the Iraq–Turkiye pipeline linking northern fields to the Mediterranean port of Ceyhan,
which can transport approximately one million barrels per day. Additional
volumes could be moved via tanker trucks or alternative logistical arrangements
if maritime routes become unsafe.
Another factor shaping Iraq’s calculations is
the role of China, the largest importer of Iraqi crude.
Read more: Without oil: Iraq’s economic future hanging in the balance
Salih noted that Beijing’s extensive maritime
fleet and long-term energy contracts with Baghdad could help maintain a portion
of Iraq’s exports even if security conditions in the Gulf worsen.
China already accounts for a substantial share
of Iraq’s oil purchases, making the stability of those trade channels a key
variable in Baghdad’s economic resilience during regional crises.
Maintaining those flows could cushion Iraq’s
fiscal position even if broader energy markets remain unstable.
Beyond the immediate impact on oil exports,
economists warn that a prolonged war between Washington and Tehran could
unleash wider economic shocks across the Middle East.
Disruptions to trade routes could raise shipping
costs, food prices, and insurance premiums, amplifying inflation across the
region. Oil-dependent economies such as Iraq would face the dual challenge of
managing revenue volatility while maintaining domestic spending commitments.
For Baghdad, the crisis underscores a
long-standing structural vulnerability: the country’s overwhelming dependence
on oil.
More than 90 percent of Iraq’s state revenues
come from crude exports, leaving government finances highly sensitive to
external shocks in global energy markets.
If the confrontation escalates further, Iraq may
find itself navigating a difficult balance —benefiting from rising oil prices
while simultaneously confronting the possibility of export disruptions and
economic instability.
The widening US-Iran confrontation has once
again placed Iraq at the intersection of regional power struggles and global
energy markets.
Baghdad’s attempt to remain politically neutral
may keep the country outside the direct battlefield, but its economic lifeline
remains tightly connected to the very routes and markets now under threat.
Whether the crisis evolves into a prolonged
regional war or gradually stabilizes through diplomatic channels will determine
how severe the economic shock becomes.
For Iraq, the conflict has already delivered a
clear warning: the country’s future economic security remains inseparable from
the stability of the region that surrounds it.
Written and edited by Shafaq News staff.
