Iraq's Insurgency and the Threat to Oil

Americans might have forgotten about the Iraq war, but they’re about to feel it at the gas pump.

Oil markets are finally rattling after militants from the Islamic State of Iraq and the Levant took over a series of key Iraqi cities Tuesday and Wednesday, including the country's second largest, and reportedly surrounded Iraq's biggest oil refinery.

The insurgent drive poses little immediate threat to oil production or exports from OPEC's second-largest producer, which explains why oil prices haven't exploded. But Iraq's disarray, coupled with a series of stubborn crude-supply outages in Libya, Sudan, Nigeria, and ongoing sanctions on Iranian exports, portends a summer of high oil prices with potentially dire effects on the global economy.

Depending on Iraq's ability to rally its own security forces and successfully fight the group, the uprising could also upend Baghdad's plans to increase oil production in other parts of the country and assert control over exports in the semi-autonomous northern region of Kurdistan. All that becomes hugely important when global oil markets are looking at growth in Iraqi production as the great hope to keep the world fully supplied.

"Iraq needs to deliver; it's as simple as that. This is not good, irrespective of whether there's a short-term impact or not," said Amrita Sen, an oil markets analyst at Energy Aspects Ltd, an energy consultancy in London. "You need a lot of incremental supply increase from Iraq, which the current dynamics are saying is not going to happen," Sen said.

The insurgent group, known as ISIL or ISIS, pushed Iraqi security forces out of Mosul -- the second-most populated city -- on Tuesday before driving further south to take Tikrit, Saddam Hussein's hometown. On Wednesday, the group seemed to have taken over the Baiji refinery, the main domestic source of Iraq's refined petroleum products.

After initially shrugging off the attacks, oil markets started to worry a bit Wednesday. Prices for Brent crude traded in London rose slightly, to just under $110 a barrel; crude traded in New York also inched up to about $105 a barrel in early trading, before slipping a bit in the early afternoon. Oil markets got no relief from OPEC, which concluded its regular meeting in Vienna pledging to keep output the same.

If oil prices haven't skyrocketed even higher on news that a group so bad that even al Qaeda fights it has taken over a big chunk of territory in one of the world's biggest oil-producing nations, that's because Iraq's oil production and exports are mostly in the south, far from the offensive. Iraqi government officials said Tuesday that the state of emergency declared after the Mosul takeover won't affect Iraqi exports.

One reason: The 400,000-barrel-per-day northern oil-export pipeline that snakes past Mosul on its way to Turkey has been out of commission since March because of terrorist attacks anyway, so the ISIS offensive hasn't taken any additional oil out of the export market yet.

In May, Iraq notched a near-record level of crude exports out of its Persian Gulf terminal in Basra, though overall Iraqi exports are still below the 2.8 million barrels a day reached earlier this year because of the damaged northern pipeline. Ongoing repairs on the pipeline have been disrupted because of the ISIS offensive, raising questions over just when that export route will again be safe and operational, despite Iraqi promises Wednesday that repair work continues.

But the bigger concerns are two-fold: The ISIS offensive comes at a time when global oil markets could soon look tight due to supply disruptions in a number of big producers, and it could have important knock-on effects on Iraqi oil production over the medium term.

Although OPEC seems content with global oil supplies, that's largely because of continued growth in U.S. oil production, which has risen more than 1 million barrels a day since the beginning of last year. But traditional suppliers are faltering: Libyan oil production has fallen to about 10 percent of levels before militants took over eastern areas of that country; South Sudan's modest oil production has roughly been cut in half by the civil war there; and Western sanctions are keeping roughly 1 million barrels of Iranian oil off the market.

Even before the latest news out of Iraq, oil-market observers were counting on Saudi Arabia, the world's swing oil producer, to churn out record levels of crude later this year to cover the supply shortfall. It could be hard-pressed to make up those missing barrels and any additional Iraqi oil taken off the market by ISIS. And whatever effort Saudi Arabia makes will ensure that oil markets are tauter and jitterier later in the year, magnifying the price fallout of geopolitical disturbances.

If the Saudis produce an additional million or so barrels a day, "there is no spare capacity in the system. So ultimately, the situation is very, very bullish" for future oil prices, Sen said.

So far, other than the city of Mosul, the insurgents have steered clear of eastern Kurdistan, which is trying to ramp up its oil production and which has often touted its relatively better security situation as a way to attract foreign investment. One concern is that, if the militants turn east, they could threaten Kurdish oil fields and take out some Iraqi production.

For now, companies operating in the region appear calm. Chevron said, "Our activities continue as normal in the region." A spokesman for Genel Energy, a Turco-British firm operating in Kurdistan, said that because ISIS is apparently avoiding taking on Kurdish forces directly, "There should therefore be no disruption in oil production or shipment on the [Kurdish] side."

However, Baghdad's efforts to fight the militants could have knock-on effects on the huge oil fields in southern Iraq that account for the bulk of Iraqi output. Every time the Iraqi government moves troops from the south to fight militants in other parts of the country, oil companies' operations are disrupted because of security concerns. In fact, Sen said, the increased cost of security is undermining the appeal of Iraq's massive and easy-to-extract oil reserves.

The ISIS offensive could have another, longer-lasting effect on Iraq's oil sector. For months, Baghdad and the Kurdish region have been at loggerheads over Kurdish plans to export oil directly to Turkey; the central government says all Iraq's oil belongs to it, while the regional government figures direct oil exports are the only way it can get a fair share of Iraq's oil wealth. Just before the ISIS attacks, in fact, Baghdad had threatened Kurdistan again over its oil exports.

All that could change if Baghdad has to call in the Kurdish cavalry, in the form of hardy Kurdish peshmerga troops, to quell the uprising. Some former Iraqi officers have already said the peshmerga, experienced in fighting guerrillas, are the only option; Iraq's foreign minister said Wednesday that Iraqi and Kurdish troops could work together to recapture Mosul.

If Baghdad has to rely on Kurdish troops to end the ISIS offensive, that could well soften Iraq's attitude toward Kurdish oil exports. It may not be great for keeping the country's coffers full, but might be just the thing for keeping the country itself.

Safin Hamed - AFP - Getty


Exclusive: War Commander Kept in Dark About Last Minute Bergdahl Deal

The Bergdahl controversy shows that the years-long rift between the White House and the Pentagon hasn't been fixed. If anything, the two sides may be further apart than ever before.

Sgt. Bowe Bergdahl's release by the Taliban in the border region of eastern Afghanistan was so rushed that not even the Afghanistan war commander or the top commander in the region knew a deal had been struck until just before or after it had been finalized, according to multiple administration officials. 

The fact that Gen. Joseph Dunford, the commander of all American and international forces in Afghanistan, and Gen. Lloyd Austin, the head of U.S. Central Command, knew about the ongoing negotiations about Bergdahl but weren't fully read into the specifics of the actual deal hasn't been previously reported. It is certain to fuel the growing controversy over whether the Obama administration rushed into a potentially ill-advised deal without fully consulting Congress or even some of the most important members of its national security team.

In another previously unreported aspect of the case, officials familiar with the matter said the White House gave its final approval of the deal so quickly that aides to Defense Secretary Chuck Hagel didn't have time to fully brief him on the contents of an internal Army investigation into Bergdahl's 2009 disappearance from his base in Afghanistan after the soldier was in U.S. custody. Hagel had been aware of the unusual circumstances surrounding Bergdahl's disappearance, but the Army report contained specific details about the case he may not have known. 

The Army report, which remains classified, paints a mixed picture of Bergdahl, who was known by his comrades as a dedicated soldier but was also seen as standoffish and intense. The military has investigated the circumstances around Bergdahl's apparent decision to leave his base in the Paktika province of Afghanistan one night in June 2009. And although Army officials haven't reached a definitive conclusion about whether he intended to return, the decision to swap Bergdahl for five high-ranking Taliban members has angered members of Congress and former members of Bergdahl's unit, many of whom accuse him of deserting his post and costing the lives of fellow soldiers who went looking for him.

Members of Congress have been demanding answers to a variety of questions about the deal to trade Bergdahl. The administration's justification for cutting the deal so quickly -- and not fully informing Congress about it -- has also been shifting since Bergdahl's release on May 31, with each iteration further angering lawmakers from both parties. Hagel will appear before a House panel Wednesday morning to try to quell the criticism and further explain why the White House acted when it did. 

It will be an uphill climb for the defense secretary, whose relationship with Capitol Hill has been rocky since his confirmation hearings. As more information emerges about the decision to free Bergdahl, it has exposed a rift between military officials and the White House over the circumstances of Bergdahl's release. On the day Bergdahl's captors delivered him to U.S. forces aboard a Black Hawk helicopter, Obama appeared in the White House's Rose Garden, along with Bergdahl's parents, Robert and Jani, to formally announce the soldier's release. The celebratory atmosphere, coupled with subsequent remarks by Obama aides, was at odds with a growing sense among some military and intelligence officials that the administration had made a bad deal and had overlooked the possibility that Bergdahl was a deserter.

When National Security Advisor Susan Rice appeared on ABC's "This Week" on June 1, she described Bergdahl as soldier who had served with "honor and distinction," triggering an uproar since many in the military -- and in Congress -- held a far more nuanced view of the former prisoner. While many troops strongly believe in the "no man left behind" ethos, large numbers saw Rice's comments as, at best, an avoidable gaffe, and at worst, an insensitive remark that underscored a disconnect between the White House and the many people in the military who saw Bergdahl as a deserter who may have effectively abandoned his fellow soldiers during one of the most intense periods of the Afghan war. 

"I don't think the White House had the pulse of what the military and the intelligence community were thinking," said one former intelligence officer who has served in Afghanistan.

U.S. intelligence agencies two years ago concluded that five Taliban prisoners who were swapped for Bergdahl would eventually return to hostilities against the United States, according to a former senior official who helped write the assessment. And it was no secret that many in the military regarded Bergdahl's disappearance from his base as a likely case of desertion. The intelligence agencies and the State Department were aware of the controversy, but the deal -- and the subsequent public rollout of it -- didn't seem to reflect the more complex view many have about the merits of swapping the Taliban figures for Bergdahl.

The administration has tried to calm the furor over the decision, but, despite a number of closed-door briefings, many members of Congress have remained unconvinced that the administration couldn't have informed lawmakers about the pending transfer 30 days earlier, as U.S. law requires. The White House has insisted that while efforts have been underway for years to free Bergdahl, a variety of factors, from his declining health to a potential threat to his life at the hands of his Taliban captors, forced a quick decision to act.

"It was a very small, fleeting window of opportunity in order to secure -- safely secure Sgt. Bowe Bergdahl," Pentagon Press Secretary Rear Adm. John Kirby told reporters on Tuesday. "And it's safe to say that the entire interagency, the entire national security team agreed that we needed to take advantage of this fleeting opportunity, and that operational security was critical to securing it safely and efficiently."

Some high-level officials were privy to the details of the prisoner swap. Chairman of the Joint Chiefs of Staff Gen. Martin Dempsey and the Vice Chairman, Adm. Sandy Winnefeld, were "completely read into the deal," one official said. But the Special Operations forces that flew Bergdahl out of Afghanistan didn't fall under Dunford or Austin's chain of command and therefore operated independently.

Although both Dunford and Austin were aware of the ongoing efforts to secure Bergdahl's release -- as were approximately 100 administration officials -- it was not clear exactly when either commander was informed of Bergdahl's rescue from his Taliban captors. On Tuesday, Sen. Dick Durbin (D-Il.), said the Obama administration only finalized the particulars of the exchange a day before it occurred, and that the military only knew the location where Bergdahl was to be picked up an hour earlier.

The controversy over the timing of the deal shows no signs of dying down due to the changing nature of the administration's rationale for securing Bergdahl's release, but also because of the fury many in the military and intelligence communities still feel over Rice's comments.

"She's never understood the military," said a former official who worked with Rice when she served in the State Department during the Clinton administration. The former official, like others, questioned why the administration would so forcefully defend Bergdahl before the full circumstances of his disappearance were known, and when the political backlash from military quarters and the administration's Republican critics was so predictable. "Let's at least say it was bad staff work," the former official said, suggesting that Obama hadn't been fully briefed by his national security team.  

Rice later clarified her remarks, saying that by "honor and distinction," she meant that Bergdahl had volunteered to fight for his country, which she called "a very honorable thing." Speaking to a CNN reporter during the 70th anniversary celebration of the D-Day landings in Normandy, France, Rice said Bergdahl "is, as always with Americans, innocent until proven guilty."

It's not only soldiers who are questioning the wisdom of swapping Bergdahl for five hardened, anti-American militants. A former senior U.S. intelligence official who maintains close personal ties to Langley said career officers are furious over Bergdahl's release. Intelligence officials believe that at least one of the so-called "Taliban Five" was present when CIA officer Johnny Spann was killed in Afghanistan in November 2001, becoming the first American casualty in the war. Many CIA employees wonder why the administration would release five men whom the CIA's own analysts said would return to the battlefield, two former officials said.

The administration has faced similar skepticism in the past from member of Congress. In 2012, shortly after the CIA, the National Counterterrorism Center, and the Office of the Director of National Intelligence completed the assessment that showed all five Taliban prisoners were likely to return to the battlefield or engage in hostilities against the United States, a delegation of deputy-level officials from the CIA, the State Department, and the White House presented the outlines of a prisoner swap to members of Congress, according to two former senior officials who were involved in the process. They billed trading Bergdahl for the Taliban Five as a "confidence building measure" with the Taliban and a chance to start a negotiated settlement to the war in Afghanistan. But lawmakers weren't buying it. 

In closed-door meetings, members of Congress accused the administration of "negotiating with terrorists," and said officials were trying to dress up a straightforward prisoner swap in the guise a diplomatic overture to the Taliban, one former official who was in the briefings said. Lawmakers also predicted that the deal would encourage the Taliban and terrorist groups to take Americans hostage and use them as bargaining chips, the former official said. With so much hostility towards the plan, the Obama administration may well have concluded, in 2014, that it was better not to alert lawmakers that a swap was moving forward, even if the law required the president to inform them of the prisoner transfer. 

The 2012 plan to trade Bergdahl for the prisoners fell apart when Afghan President Hamid Karzai demanded that the United States cease negotiations with the Taliban, the former official said. After that, "the whole thing just collapsed."

But even if Karzai hadn't interceded, it's doubtful the swap would have succeeded. Key to the deal was moving the prisoners to Qatar, where they would remain under watch for some period of time. But that same intelligence assessment that the Taliban fighters would likely return to hostilities raised doubts about the ability of the government of Qatar to effectively monitor the prisoners, the former official said. Intelligence officials wanted the personal commitment from Qatar's ruler that the prisoners wouldn't be allowed to escape or set up a remote base of operations and direct attacks against American forces. 

"I always personally thought, and the analysts did, that a commitment from the emir to President Obama would carry an awful lot of weight," the former official said. Separately, a former administration official involved in the negotiations said that moving the prisoners to Qatar without those personal assurances from the country's monarch "was a non-starter."

But that commitment didn't come until late May of 2014, when the new emir of Qatar, Tamim bin Hamad al Thani, who had ascended to the throne the previous June, called Obama and pledged that the prisoners would be kept under surveillance and prevented from travelling outside the country for at least a year. That gave the administration some measure of comfort that they could move forward with the swap, and reportedly helped to quell the dissent of a number of high-ranking officials, including Director of National Intelligence James Clapper, who had opposed trading for Bergdahl. But it was also a win for the Qataris. 

"This was an opportunity for the emir to demonstrate his willingness to play an important role with the United States, and that's extremely important to him," said an individual close to the Qatari government who is familiar with its foreign negotiations. Qatar has long "wanted to be in the position of being the one party to a negotiation that's always willing to talk to the other side when the U.S. and the Europeans aren't," the individual said. Qatari officials have acted as intermediaries to Hezbollah, Hamas (which the United States had declared a terrorist organization), the al-Nusra front (an al Qaeda affiliate in Syria), and the Taliban, among others. "That's always the card they play" in order to "punch above their weight" on the world stage, the individual said. But it doesn't always play to the United States' interest.

In this case, it did. The emir's assurances to Obama removed arguably the last remaining obstacle to getting senior U.S. intelligence officials onboard with the deal. Less clear is whether the intelligence agencies have changed their view on whether the Qataris can actually make good on their commitments. But once the emir gave Obama his personal assurances, there was little the spies could say to block the swap. The administration now had the final missing puzzle piece. The prisoner exchange took place four days later.