Some signs have emerged of political compromise, at least between some of the factions. Recently, the announcement of an oil deal between the Kurdistan Regional Government (KRG), a semi-autonomous government that administers Kurdish areas in Iraq, and the central government ended a months-long standoff between the two. The dispute began when the KRG began to export oil independently of Baghdad, prompting Baghdad to freeze payments to the KRG. The recent agreement will allow for the KRG to send 250,000 barrels from Kurdistan and 300,000 barrels from Kurdish-controlled Kirkuk to Baghdad, with the KRG receiving 17% of the national budget in return.
Much fanfare was associated with the announcement of the Erbil-Baghdad oil deal. The United States sees it as a way to “further strengthen both Iraq’s Federal Government and the Kurdistan Regional Government as they work together to defeat" the Islamic State. When compared to remarks by Kurdish officials earlier hinting toward a push for independence, this deal is very significant in bringing Iraq back from the brink.
But undercutting this latest agreement is a decision by the Organization of the Petroleum Exporting Countries (OPEC) to not cut production in the face of falling oil prices. At the time of this writing, Brent Crude Oil was at $69.54/barrel, a level not seen in 4 years. This is largely due to a flooding of the market – the US shale boom and Libyan oil exports coming back online being big reasons. Because OPEC is not cutting production in order to raise prices (and US shale producers have signaled the same), the oil that the KRG exports will only add to the glut, driving prices further downward.
The low oil prices are having a negative effect on Iraq and feeding into its ability to fight the Islamic State. For Iraq to “break even” on its national budget, it needs oil prices of around $106/barrel according to estimates. OPEC’s refusal to cut production means that prices will not reach anywhere near $106/barrel soon, with estimates believing that the price will stabilize closer to $60/barrel in the short term.
This issue of low oil prices combined with corruption -- something like $1 billion was spent by the government on fictitious soldiers over the last 5 years -- is causing the Iraqi government to run a deficit on its national budget. Iraq is establishing a commission to address the projected budget deficit, which may result in budget cuts. This is problematic, as the country is already trying to cope with what has become a complete ground war against the Islamic State. With the United States proving reluctant to send in combat troops (more than “just” the advisers), the bulk of the fighting on the ground will be between Islamic State forces and the Iraqi security forces, together with Shia militias and the Peshmerga. It is hard to finance competent security forces (something Iraq desperately needs) on tighter budgets.
Not only the finances are a problem for Iraq. Shia militias have largely been accused of crimes as horrendous those attributed to the Islamic State. The siege of Ramadi, a Sunni city in West Iraq that is surrounded by lands controlled by the Islamic State, has hardly been addressed by the Iraqi government. Though the Kurdish and Shia politicians have made progress on at least one political issue, far more cooperation needs to be demonstrated between them and Sunni politicians in order to foment an Iraq that can exist without partitioning. Even oil prices were higher, these problems, which are a main underlying issue causing the conflict in the first place, would still be around.
The United States should – and has – called for Iraq to get its political house in order. It would appear that the new prime minister, Haider al-Abadi, is making a sincere effort to do so. But tighter budgets will hamper his efforts. This is a problem that the United States cannot hope to delve into, but so long as it persists the United States’ campaign against the Islamic State will be undercut.