Nothing captures the myopic view of the oil world better than the market's recent dismissal of the big "new" oil in Iraq. On April 19, a Houston-based oil analyst, IHS, released a study showing Iraq's oil reserves to be around 220 billion barrels--or nearly twice as big as previously thought. Such reserves, IHS argued, meant Iraq's potential daily output could eventually top 9 million barrels, exceeding that of the current leader, Saudi Arabia.
In the oil markets, reaction to the news was....almost non-existent. In fact, the price for the benchmark West Texas Intermediate jumped above $65 for the first time in months, and other grades rose sharply. One reason is that oil markets are far more interested in factors that can affect price immediately--in this case, increasing tensions over Iran's nuclear program, as well as declining stocks of gasoline in the United States.
But another reason is that oil markets have long been skeptical about any forecasts about Iraq's glorious petro future. Predictions that Iraqi output would soar after liberation proved disastrously wrong: production has fallen from a pre-war level of more than 3 million barrels (mbd) a day to less than 2mbd--largely because the nation remains too unstable to repair existing infrastructure, much less expand it.
Which, of course, is precisely why oil markets treat the revised reserve estimates as a non-event. As IHS pointed out, activated Iraq's untapped fields would require at least $25 billion in outside investment. Yet few companies are willing to make that kind of commitment until the fighting (much of it driven by conflicts over oil revenues) is settled.
"Obviously the security situation is very bad," Ron Mobed, IHS' president, told the Khaleej Times of Dubai. "But when you look at the sub-surface opportunity, there isn't anywhere else like this. Geologically, it's right up there, a gold star opportunity."
But if market reaction is any indication, it's a gold star opportunity that won't pay for some time.