June 6, 2011

TSG IntelBrief: Iraq v. Kuwait and Upcoming Oil Supply Problems


  The Government of Kuwait v. the Iraq Airways Corporation   Page 3
  Kuwait Moves to Undermine Iraq's Maritime Supply Chain   Page 4
  Two Ports in a Storm   Page 4
  The Impact on Oil Supply Chains   Page 6
  The need to defuse a politically explosive situation   Page 7



The general political situation in the oil and gas producing regions of the Middle East is becoming more tense, especially between Iraq and Kuwait.  Tensions between the two are steadily rising as Kuwait aggressively pursues restitution for the 1990 invasion by threatening to seize Iraqi assets in compensation for their losses.

In the last year Kuwait has deliberately forced the grounding of the Iraqi national airline, and in the last week it has slapped the maritime gauntlet across Baghdad's face. On June 30, 2011, Iraq's protection from Kuwait sequestering assets it believes are hers runs out, and after that Kuwait is set to take further action, starting by seeking the enforcement of a ruling in the British courts that during the 1990 Gulf War, Iraq Airways Corporation stole 10 commercial airliners, spare parts, and other ancillaries from Kuwait, worth in total around $1.2 billion.

Kuwait's actions are also likely to hit Iraq's ability to supply the world with oil, if, as expected (and highly likely), it goes after Iraqi oil tankers and other assets. If Iraq – which currently supplies the global fuel supply chain with some 2.68M bpd of crude oil – is taken out of the supply chain, then the world could be down nearly 4 million barrels of crude oil daily (a reduction of nearly 4% of supply to service the global daily demand).

The impact will be felt across the world. Italy and South Korea in particular have agreements with Iraq to supply them with crude oil in significant quantities. This will have a serious effect on their economies, and on the European economy, as well as impacting every country that trades with these nations.

The world is connected by supply chains of food, money and fuel.  The interconnectivity of the world means that supply chain interruptions create domino effects.  Any disruption of the supply of any one of those sees stock markets soaring or crashing, commodities being bought and sold like people's lives depended upon it, and lines forming at gas stations.

This bad news comes in the midst of the continuing arguments on whether or not U.S. forces will stay in Iraq after 2011. These further complications will potentially take months, if not years, of activity, along with billions of dollars to solve – as well as the need for some pretty impressive political footwork in a country where impressive political footwork is a rare commodity.


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