Polycrisis in Iraq Deepens as Iran War Disrupts Oil Exports and Trade Routes

    Iraq is entering a critical phase of economic instability as the ongoing Iran-related conflict disrupts its most important revenue source—oil exports. With shipping routes constrained and regional tensions escalating, Iraq now faces what analysts describe as a “Polycrisis”, where multiple overlapping shocks threaten its economy, energy sector, and political stability.

This situation highlights Iraq’s heavy dependence on oil exports and its vulnerability to geopolitical disruptions in the Middle East.

What Is Happening to Iraq’s Oil Exports?

Iraq’s oil exports have been severely impacted due to disruptions in the Strait of Hormuz, a vital maritime chokepoint through which a significant portion of global oil flows.

  • Tanker movement through the Strait has been heavily restricted

  • Export operations from southern terminals have slowed or halted

  • Storage facilities are reaching capacity limits

  • Oil production has been forced to decline due to export bottlenecks

Before the disruption, Iraq was exporting over 3 million barrels per day, but recent constraints have sharply reduced or temporarily halted this flow.

Why Iraq Is Facing a “Polycrisis”

The term Polycrisis refers to multiple crises occurring at the same time, amplifying each other’s effects. In Iraq’s case, these include:

1. Energy Export Disruption

  • Oil exports account for over 90% of Iraq’s national revenue

  • Any interruption directly impacts government spending and public services

  • Export shutdowns create immediate fiscal pressure

2. Storage and Production Constraints

  • Crude storage tanks are filling up due to halted exports

  • Fields continue producing but cannot offload output efficiently

  • Production cuts are becoming necessary to avoid operational shutdowns

3. Regional Conflict Spillover

  • The Iran war is affecting Iraq despite it not being a direct participant

  • Shipping risks, insurance costs, and logistics disruptions are rising

  • Energy infrastructure across the region is increasingly exposed

Energy infrastructure under attack

Tehran’s retaliatory strikes on the energy infrastructure of its Arab neighbours has added another layer of uncertainty in the global energy market. Qatar has already shut its gas production operations. The UAE said this week that operations were suspended at its Shah gasfield after a drone attack. Saudi Aramco also shut operations at its Ras Tanura refinery early this month after a fire broke out following a drone attack.

Iraq’s energy infrastructure has also come under attack, curtailing the country’s hydrocarbons production significantly. Its Majnoon oilfield, which has already suspended crude production, was attacked again on Monday. Iraq also suspended its oil port operations on March 12 after two tankers carrying fuel were hit in its territorial waters near Basra.

Although there have been incidents affecting Iraqi oil related infrastructure, “the damage has been small, with no reports of major destruction and repair costs are likely to be shared with international partners”, Mr Afifi said. “Our baseline scenario assumes the strait will remain effectively closed for up to a month, with no major damage to energy production and transport infrastructure. This would result in Iraq losing up to a month's worth of oil export receipts,” Mr Afifi said.

Fear tactic

The daily attacks by Iran-backed militias on Iraq's Kurdistan region have also forced operators to shut down operations, taking off 200,000 bpd of the region's oil production that used by be exported through Turkey’s Mediterranean Port of Ceyhan, according to oil company officials. Drone attacks in the vicinity of Rumaila and Majnoon oilfields in the south is more of an attempt to force the companies to shut down operations, the officials said.

Huge problem

The events in the past two weeks have “caused us a problem”, Iraqi Oil Minister Hayan Abdul Ghani said in a statement sent to foreign media on Thursday. The government was forced to decrease production to about 1.4 million bpd to be sent to refineries, down from around 4.3 million bpd, he said. Iraq is now desperately looking for options, and it also in contact with Iran to allow some oil tankers shipping Iraqi oil to pass through Strait of Hormuz, Iraq’s state-run news agency quoted Mr Ghani as saying on Tuesday. It is however not clear what stage the Iran-Iraq talks are at the moment. Its other options include shipping up to 200,000 bpd across land through Turkey, Syria and Jordan.

KRG conundrum

The second is to pump at least 150,000 bpd through the Kurdistan Export Pipeline (KEP) to Turkey’s Metatherian port of Ceyhan. The pipeline is owned by the Kurdistan Regional Government (KRG) and is operated by the Kurdistan Pipeline Company (KPC).

A dispute between the federal authorities in Baghdad and Kurdistan delayed the arrangement for days. However, an agreement was reached on Tuesday to resume pumping oil on Wednesday. The KRG demanded Baghdad removes a customs policy imposed in January. The new system is part of a wider reform plan introduced by Baghdad to impose more control on imports and tariffs and eventually end money laundering and corruption. It also asked Baghdad to buy excess electricity produced in the region.

It also said last week that “outlawed militias” made oil, gas and energy fields “targets of their attacks”, taking production offline and leaving “no oil available for export”. Baghdad has taken “no effective measures” to stop the assaults and claimed “many of the perpetrators … receive salaries and support from Baghdad”, KRG said at the time.

On Tuesday, Iraq warned the KRG of legal action over its refusal to allow oil exports, accusing Erbil of breaching the Iraqi constitution. However, even if Baghdad manages to resolve differences with the KRG and strikes a sweet deal with Iran on passage through the Strait of Hormuz, Iraq’s economic woes and its policy independence troubles are far from over, Mr Saidi said. “Iraq is the only major sovereign nation whose primary revenue stream (from oil) is held in a foreign central bank (the Fed), giving the US substantial power over Iraq’s domestic governance,” Mr Saidi said.

While Iraq’s central bank claims to have about 11 to 12 months of import cover, this liquidity is still in NY Fed-controlled accounts. The country's international reserves stood at $97.5 billion as of November, according to the Central Bank of Iraq. The country imports about 90 per cent of its consumer goods, food, and medicine and is “financed by the petrodollar held at the Fed”, Mr., Saidi said. “The large informal economy (an estimated 60 per cent of non-oil GDP) will also be vulnerable to the current Hormuz shutdown,” he added.

Impact on Iraq’s Economy

The disruption of oil exports is triggering several economic consequences:

  • Budget strain due to lost oil revenues

  • Currency pressure and inflation risks

  • Investment slowdown as uncertainty increases

  • Supply chain disruptions affecting imports and domestic markets

Iraq’s economy, which is heavily reliant on oil, has limited diversification to absorb such shocks, making it particularly vulnerable to external instability.

Role of the Strait of Hormuz

The Strait of Hormuz is one of the most critical energy corridors in the world, handling a large share of global oil shipments. Any disruption in this narrow passage has immediate consequences for Iraq and other Gulf producers.

  • It connects Iraq’s southern export terminals to global markets

  • It is highly sensitive to military tensions and naval activity

  • Even partial blockages can significantly reduce tanker traffic

Because Iraq lacks alternative export routes at sufficient scale, its dependence on this passage creates a structural vulnerability.

Attempts to Mitigate the Crisis

Iraq has been exploring potential solutions to reduce export dependency on Hormuz:

  • Reviving pipeline routes to Turkey via the Kirkuk-Ceyhan corridor

  • Negotiating with regional actors to secure tanker passage

  • Considering alternative export logistics through neighboring regions

However, these solutions require time, political coordination, and infrastructure readiness, limiting their immediate effectiveness.

Broader Regional Implications

The crisis affecting Iraq is part of a wider regional energy shock:

  • Oil prices have surged due to supply disruptions

  • Other Gulf producers are also facing logistical and security risks

  • Global energy markets are experiencing increased volatility

  • Investors are reassessing risk exposure in the Middle East

The situation underscores how interconnected regional conflicts can rapidly escalate into global economic challenges.

Conclusion

Iraq’s current Polycrisis reflects a convergence of geopolitical conflict, infrastructure limitations, and economic dependence on oil exports. The disruption of the Iran war has exposed structural weaknesses in Iraq’s economy, particularly its reliance on a single export route and limited diversification.

Unless alternative export channels and economic reforms are accelerated, Iraq may continue to face significant instability driven by external geopolitical events.




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