Iraq Tensions Will Cost You at the Gas Pump

NEW YORK (MainStreet) — Higher gas prices will prevail at the pump with the threat of military actions in Iraq rising since even the threat of a disruption in the supply of crude oil sends the market into a frenzy, industry experts said.

The political turmoil in Iraq affected international oil prices immediately, which rose by 5% when news first came out about the increased insurgent activity, said Rob Desai, an energy analyst at Edward Jones in St. Louis.

Also See: Prepare to Pay More For Gas As Summer Approaches

Wholesale gasoline prices rose also by 5% since the U.S. still imports a significant amount of oil, he said.

"I think heightened prices reflect the risks properly, although I would expect oil prices to increase even more if we begin to see an impact on Iraqi oil production," Desai said. "In the past, war and military action has had an impact on oil production, so I think this is a very possible scenario."

Prices at gas pumps across the country are currently averaging $3.67 a gallon, according to Gasbuddy.com. The lowest price is in South Carolina where gasoline prices are $3.38 a gallon and ranges from $3.49 a gallon in Texas to $3.88 in New York. The highest gas is in Hawaii at $4.34.

Iraq remains a significant player since it produced 3.1 million barrels per day in 2013 or 3.5% of global production. Iraq is OPEC's second largest crude producer, the world's third largest exporter of oil and has the fifth largest crude reserves in the world. Russia and Saudi Arabia are the world's largest producers, and they each produce 10 million barrels a day.

"This is a significant amount to remove from the market and would have global implications," Desai said. "OPEC has some spare capacity, so I wouldn't expect new highs or anything too significant, but some noticeable increase would make sense."

A drop in Iraqi oil production could occur at any time, but what remains to be seen is the magnitude of the decline, even though some international oil majors such as BP and ExxonMobil have already evacuated employees from the area, Desai said.

If there is a large decline in production, then prices could increase "fairly quickly," he said. The decreased production will be offset partly by OPEC increasing production in Saudi Arabia. However, recent reports show OPEC's spare capacity is a little over 2 million barrels, so there is not enough volume to replace Iraq's output.

"The direct effect is that Iraqi oil customers will have to find new sources of oil," Desai said. "This causes increased demand for other oil cargoes, which tends to lead to higher prices. I would expect this to happen if oil production is affected, if pipelines are shut down or if cargo ships are not able to be loaded at Iraqi ports so supply is removed from the market."

A prolonged conflict could also have an impact on exported gasoline as the Baiji refinery has been impacted, so Iraq will likely have to import products, he said. This could make gasoline/diesel export prices more attractive in the short term.

If the conflict continues, prices are likely to continue rising through the summer, said Chris Faulkner, CEO of Breitling Energy, a Dallas oil and gas exploration and production company. On Tuesday, the average price of gasoline of $3.69 per gallon was $0.06 higher than this time last year.

Gas prices will rise by as much as 20 cents to 25 cents per gallon in the next several weeks if the conflict continues and disrupts production and exports, he said.

"Right now it's not just the situation in Iraq that's making global markets jittery," Faulkner said. "We have China building its petroleum reserves, we have security concerns in Nigeria and Libyan oil is now nonexistent because of the crisis there."

Since the conflict currently has been contained to northern Iraq, the effect has been "relatively minimal" and will continue to remain nominal if the situation continues to be contained there, Faulkner said.

If the conflict expands into the south of Iraq, further disruptions to production will occur.

"We're in for a bumpy ride because southern Iraq is home to one third of Iraq's crude output since the country's three biggest oilfields are in that region," Faulkner said.

Global oil prices are often affected by geo-political events and the fear of a disruption in supply and production can push up wholesale and retail prices temporarily.

The spike in prices has not been "nearly as severe as would have been the case a decade ago when the world was so heavily dependent on Middle Eastern oil," said Bernard Weinstein, associate director of the Maguire Energy Institute at the SMU Cox School of Business in Dallas.

Since the price of crude oil accounts for about 65% of the cost at the pump, consumers could see a further increase of 5 to 6 cents per gallon in coming weeks, but then prices should level off or possibly decline, he said.

Since oil production in America has increased by nearly 50% over the past five years, the effect on prices in the U.S. would not be significant, Weinstein said.

"If all Iraqi production and exports should come to a halt, the impact on global prices would be minimal," he said. What's more, the projected increase in U.S. oil production of 2.5 million barrels per day over the next two years is about equal to total current production in Iraq."

U.S. refineries may be able to increase output in response to a price increase, which would soften any price increase, said Peter Zaleski, an economics professor at the Villanova School of Business.

"According to the U.S. Energy Information Agency, U.S. refineries are operating at about 86% capacity, down from a recent high of 92% in December 2013," he said. "Any reduction in global supply will raise prices since it is a global market."

--Written by Ellen Chang for MainStreet

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