Cascading System Disruption

Earlier this month, I wrote about the systems disuption attacks against the oil industry in Iraq. The newest wave of attacks have been focused at closing down effective production at the major refineries, thus forcing a combination of fuel shortages, massive price increases, and a significant increase in imports of refined products into Iraq. In that post I wrote two things of relevance:

the Iraqi government will face an even more significant revenue squeeze in the future. We know that already the Iraqi government has had problems paying its soldiers and conducting normal day to operations due to cash constraints. If we are to assume that the combination of the insurgencies and general lack of maitenance over time continues to degrade the extraction, refinement and distribution systems of the oil industry, then the cash flow problems become even worse for the Iraqi government. Already, due to the two problems of an effective sabotage campaign and long deferred maitenance, the Iraqi government imports $200 million dollars worth of refined fuel per month, eating up 10% of total hard currency earnings…….

I also am expecting to see the Iraqi government get real creative in saying that the check is in the mail

We are starting to see these predictions come true as this new article from Turkey quotes the Turkish Oil Minister that refined product exports to Iraq could halt on January 21, 2006 if payments don’t come through.

I fully expect that these payments will come through this time as the US still has some slush fund money available in the reconstruction budget, but the oil and thus hard currency production system of Iraq is completely disrupted. Beyond the immediate spin-off effects of further increasing the fiscal strains of the government as they have the tough political choice of either telling their voters to suck it up (always a rewarding experience) or going deeper into debt to bring in the imports, and thus diverting funds from other needed activities to pay off debt service costs alone. At the same time, fuel shortages should reduce the ability of the Iraqi military to operate independently of the United States. This will reduce the limited effectiveness of these formations and makes the clear and hold strategy even more difficult to implement.

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