According to the annual BP Statistical Review of World Energy published this month, Iraq has 150bn barrels of proven crude oil reserves. Its126.7tn standard cubic feet (scf) of natural gas reserves is the equivalent of a further 21bn barrels.

With oil prices now above $110 a barrel, that means the market value of Iraq’s proven hydrocarbon reserves this summer is about $16.5tn.

This is probably an underestimate.

MEED’s annual Kurdistan Projects conference at the start of June was told that potential oil reserves in parts of Iraq it controlled by the Kurdistan Regional Government (KRG) could be greater than 100bn barrels. This is more than double the figure usually associated with the three northern provinces of Iraq.

Add that to the total and the value of oil in Iraq’s soil could be more than $20tn.

This is a mind-boggling figure. The developing contest for this prize lies at the heart of the crisis racking Iraq, the region and the world this summer.

Iraq’s massive mineral wealth is in play, but everything else involves guesswork.

Washington’s challenge

US Secretary of State John Kerry was in Baghdad on 23 June to encourage Iraqi Prime Minister Nouri al-Maliki to step aside or appoint a cabinet of national salvation involving representatives of the Kurds as well as alienated Sunni Muslim communities. Al-Maliki may try, but it may be too late to persuade the Kurds and Sunni rebels to give up their recent gains in territory and wealth.

Some fear the Islamic State of Iraq & the Levant (Isis) is poised to take control of yet more of Iraq and could threaten Jordan. Others say Isis is already overreaching and making errors. Behind the ruthless Jihadist fighters is a coalition of former Baathists and tribal leaders that might be willing to do a deal with Baghdad, but only if the terms are right.

Then there are Iran, Saudi Arabia and Turkey. Will they continue to compete for influence in Iraq’s disintegrating northern, eastern and western portions?

Finally, what will the US do? President Obama’s comments about the possible use of force against ISIL have been inconsistent, but he has kept open the possibility of air strikes. The American people, it is universally reported, are tired of war and want no more, but we’ve heard that before. The US may have no better option.

Secular Arab nationalists deposed the pro-Western Hashemite monarchy and seized power July 1958. In 1972, the ruling Arab Baath Socialist Party announced the nationalisation of Iraq’s oil industry. International involvement in Iraq’s oil industry was blocked for 30 years. Oil companies could buy Iraqi oil at official prices, but the real prize, the reserves, were out of reach.

Kurdish opportunity

This changed in the wake of Iraq’s expulsion from Kuwait in 1991. The KRG had been formed in 1992 following the creation of a coalition no-fly zone over northern Iraq that allowed Kurdish rebels to take effective control of three of the country’s provinces and hold elections. With Iraq under military occupation from April 2003 and the Kurds co-operating fully with allied forces, the KRG started to assert itself.

Iraq’s first free parliamentary election was held, and for the first time in Iraqi Kurdistan since 1992, in 2005. The KRG had a popular mandate to press ahead with a programme of radical economic reform that echoed the approach adopted in the former Communist states of Eastern Europe after the fall of the Berlin Wall. It adopted a far-reaching programme of free market reforms and threw open the doors for international oil companies to explore for and develop oil reserves. The terms were the most generous offered by a Middle East government in the modern era. About 30 companies, including the global giant ExxonMobil, signed deals.

The full consequences have only now become obvious. The fantastic returns on offer in Iraqi Kurdistan have encouraged oil companies with concessions to get production going as soon as possible. Initially, Kurdish oil was exported by truck but this was obviously inadequate. Last December, a connection from Kurdistan’s new producing fields to the Iraq-Turkey crude oil pipeline was completed. It was a turning point for the region and the whole of Iraq.

The pipeline gave the KRG the capacity to deliver 100,000 barrels a day (b/d), worth more than $10m every 24 hours, to Ceyhan and foreign markets. Baghdad objected strenuously to the KRG using the pipeline to export crude oil and punished the KRG by slashing transfers of Iraq’s oil export income. By the end of May, the KRG was claiming the government of Iraq owed it $7bn.

Export routes

The KRG response was predictable and decisive. By the end of June, more than 1m barrels of Kurdish crude oil had been stored in Ceyhan. Frustrated by Baghdad’s continuing objections, the KRG with the backing of the government of Turkey approved the transfer of its oil to a tanker that set sail at the end of May. It seems to have delivered crude to Israel in a flagrant breach of the Arab world’s embargo on exports to the Jewish state in yet another twist to this extraordinary tale. The second shipment left Ceyhan on 9 June. More tankers are due to sail very soon, the KRG says.

For the first time, significant volumes of Kurdish oil are being supplied to global markets through a reliable delivery mechanism in return for hard cash. The KRG says that it’s aiming for 400,000 b/d of exports by the end of the year. At that point, it will be financially self-sufficient and able to exist without transfers from Iraq.

The KRG forecasts oil production will rise to 1m b/d by the end of 2015. This could mean Iraqi Kurdistan will earn about $37bn from oil production in 2016. If the goal of producing 2m b/d in 2019 is achieved, that figure could rise to at least $75bn. It will make Iraqi Kurdistan one of the wealthiest places on earth and an economy to be reckoned with.

Iraq’s coalition government led by Al-Maliki since 2006 has been determined to maintain Iraq’s unity and is banking on rapid increases in oil production to provide the money to make that possible. Its original long-term oil production target was unfeasibly high, but the government still aims to have at least 7m b/d of capacity by the start of the next decade. If that were to happen, Saudi Arabia’s dominant position within OPEC would be called into question. Iraq, in turn, would finally fulfill its promise and emerge as a regional superpower.

Events over the past year have decisively altered perceptions about Iraq’s capacity to attain this goal. In 2013, Iraq’s oil production outstripped Iran’s for the first time since OPEC was founded in 1960. Some estimates suggest Iraq’s total oil production last year was at its highest level since oil was discovered in 1927. Never before had an Iraqi government had so much money. Growing regional and international influence is bound to follow.

The possibility that Iraq could match or even overtake Saudi Arabia in the global oil supply league table would constitute a revolution in the structure of world energy If that were to coincide with closer economic and political links between Baghdad and Tehran, the balance of petrodollar power that has been in Arabia’s favour for 70 years would shift decisively to the east.

Riyadh

The extent to which this factor has played a role in Saudi Arabia’s complicated role in financing opposition groups in Syria is an open question. The kingdom had for decades tolerated the secular Baathist regime in Damascus, but King Abdullah failed to hit it off with President Bashar Asad. In 2005, assassins believed to have been under Asad’s orders killed Prime Minister Rafic Hariri, a Saudi Arabian of Lebanese origin and Riyadh’s firm friend.

Relations between Riyadh and Damascus collapsed following the Syrian government’s repression of demonstrations in 2011. Rebellion erupted across Syria with support from Syria’s Sunni Muslim majority. Saudi Arabia and other Gulf states decided the Asad regime had to go and started providing money and weapons to Syria’s rebels, including the group that has now emerged as Isis.

Riyadh credibly denies it aids Isis. But the group’s decision to turn its attention to Iraq has served Saudi Arabia’s interests. It has put pressure on Iraq, which the kingdom believes is manipulated by Iran, and it has dealt a blow to confidence about the government’s capacity to deliver the promised oil production capacity increases.

The prize

The centrifugal forces now at work in Iraq originate in history, religion, tribal affiliations and decades of conflict. But its oil and gas, and the money and power it provides, is now the key.

Iraq’s oil prize could be ignored in the days before 2003 when state control and sanctions put it beyond reach. But the destruction of Iraq’s government that year started the process that has for the first time in half a century broken Baghdad’s grip over Iraqi oil this summer.

For Baghdad, control of Iraq’s oil resources is essential if it is to meet promises to restore the country’s prosperity and pride.

For the KRG, control of oil has put the dream of independence within reach.

For Isis and other Sunni Muslim Iraqis, Iraq’s oil treasure could allow them to follow Kurdistan’s route towards greater domestic influence, autonomy, and eventually, even independence.

Ideology matters in Iraq, but money matters more. The battle for Iraq’s oil wealth has only just begun. It may never end.