In recent months, the Islamic group known as ISIS has taken over large sections of northern Iraq. Included in that area are oil fields. ISIS has taken over these oil fields and has been trading the crude oil on the black market. Granted, the amount of oil fields that ISIS controls is small compared to the rest of Iraq but the market is believed to be in the area of $2 million a day. According to CNN ISIS has been selling this crude at roughly $25 a barrel. Which is much lower than the average of around $100 a barrel. My question is, how does this influx of cheap oil onto the market hurt or help the countries around Iraq?
One way to look at this question is to ask how this effects terms of trade for neighboring countries and Iraq. According to the CNN article, some of this oil is being sold in Iraq and Syria and some of it is being smuggled into Turkey. Turkey has been turning a blind eye to this black market. This increase or cheap oil onto the market reduces demand for oil sold on the regular market. This decrease in demand would lead to a decrease in price. This would improve Turkeys terms of trade if it regularly imports oil from Iraq. The price of their imports would decrease while the price of their exports would stay the same. On the other hand this price decrease would hurt Iraq’s terms of trade since the price of their imports would stay the same while the price of their exports decreased.
If ISIS continues its march deeper into Iraq, and is able to take over more and more oil fields, Iraq’s terms of trade could be seriously harmed. Although this could be good news for the U.S. since the influx of cheap oil on the black markets could keep the price of oil down lower than it should be. On the other hand, this could be bad news as well considering ISIS would become completely self-sufficient financially.
http://edition.cnn.com/2014/08/18/business/al-khatteeb-isis-oil-iraq/
Jeff- Your post brings up a lot of interesting points regarding world trade and even ethics. If you assumption is right, which I believe it is, then every other country besides Iraq is benefitting from this sale of black market oil. If you are importing oil, it is going to be cheaper because there is an abundance being made available by the ISIS group. Though the United States likely does not condone this activity, it makes you wonder if we are intentionally turning a blind eye because it helps our terms of trade. In other words, the United States knows they are going to be benefitting from it, so they allow the black market trade to happen because their oil imports will likely become cheaper. However, the United States is also in the midst of helping Iraq rebuild their economy, so we might not be okay with these actions because Iraq is taking such a hit. You are definitely right when you say that if ISIS continues this on a larger scale, the Iraqi terms of trade will take a significant hit.
ReplyDeleteThis will be bad because of ISIS group controlled oil price. I believe ISIS is specific anti government group or Islam group who against US and also world. However between $25 for barrel and $100 average price has a big gap. For short time, it will be good for the consumers but it will be not good for the long term for trade. For the facts, low price not always make a good result.
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