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Oil shortage a pressing issue for Iraq’s economy

/ Source: CNBC

This week marks two years since the invasion of Iraq, and although the country is free from the oppression it suffered under Saddam Hussein’s dictatorship, big economic challenges remain as Iraqis work to rebuild their war-torn country.

One of the country’s most pressing challenges is a lack of crude oil, which is unusual for a nation with oil reserves second only to neighboring oil-producing giant Saudi Arabia.

In theory, with its vast reserves of oil — some 155 billion barrels — the country should be able to supply much of the world's demand for oil, never mind its own needs.

But today Iraq is producing less than 2 million barrels of oil per day, even though the nation is currently capable of producing between 2.8 and 3 million barrels daily. It wasn’t supposed to be this way explains Daniel Yergin, chairman of Cambridge Energy Research Associates.

“There was a kind of fantasy before the war that Iraq would suddenly produce this flood of oil that would transform the world oil market — that hasn’t happened,” said Yergin.

At the refineries that convert Iraq’s crude oil into gasoline, the problems continue. The director of Baghdad’s oil refinery, Dathar Al-Khashab, says the facility is only running at 70 percent capacity. The reason, he says, is the refinery’s infrastructure has been under continuous attack.

And lengthy lines at gasoline stations are not an unusual sight in Iraq. The strange phenomenon has a number of rational explanations: smuggling, sabotage and outdated equipment to name a few.

But those are just the gasoline supply issues. On the other side of the equation, demand for gasoline has skyrocketed as the number of cars in the country has doubled since the U.S. invasion two years ago.

Under Saddam Hussein's rule, Iraqis needed permission to own cars, and the dictator kept import duties very high. But now that he is gone, millions of cars have flooded across the nation's borders and boosted the demand for fuel.

And despite Iraq’s shortage, the government maintains gas prices at only 5 cents a gallon, encouraging smugglers to take it to neighboring Jordan where they sell it for more than a dollar a gallon.

Now one of the most oil-rich countries in the world is in the bizarre position of importing 2 million gallons of gasoline a day.

The only remedy for the country’s situation is money, and a lot of it, Yergin says. To improve Iraq's oil infrastructure so it can produce up to 5 million barrels a day, it will take $40 billion of investment, he says. And that doesn’t include the money needed to upgrade oil refineries.

So finding a solution to Iraq’s oil production problems isn’t only important to Iraqis, it’s also important to the global economy, and it’s a critical issue for the United States because the sooner as the nation’s oil revenues increase, the less the United States has to spend on rebuilding the country.