Shafaq News/ US President-elect Donald Trump is considering a maximum pressure sanctions campaign on Iraq, OPEC's second-largest oil producer, as part of efforts to curb Iran's influence, sources familiar with the discussions told S&P Global Commodity Insights.

The proposed measures, which mirror the stringent sanctions already imposed on Iran, could target Iraq’s crude oil production and exports. According to S&P Global Commodity Insights, Iraq produces over 4 million barrels per day (b/d) of crude oil, with exports averaging 3.6 million b/d.

Focus on Iran-Linked Entities

The sanctions may not directly restrict Iraq's oil exports but could focus on Iran-aligned entities and individuals, including figures within Iraq’s state oil marketer SOMO, said Bob McNally, head of the Washington-based consultancy Rapidan Energy.

Sources indicate that Iraq’s waivers to import Iranian gas and electricity could also be revoked. Such a move would exacerbate Iraq’s energy crisis, as the country relies on Iranian imports to offset frequent power outages.

“I’ve been advising clients since spring that a Trump 2.0 government would likely target Iraq's increasingly pro-Iranian government for sanctions,” McNally told S&P, though he added that the focus might be limited to specific actors rather than broad oil export restrictions.

Strained Energy Ties

Iraq's dependency on Iranian energy was highlighted on Nov. 24 when Iran slashed its gas exports to Iraq, cutting supplies from 25 million cubic meters per day to 7 million, resulting in a loss of 5.5 gigawatts of electricity for Iraq.

This dependency, coupled with Iran-aligned militias' growing influence in Iraq’s oil sector, has fostered a “gray market” trade in crude oil. According to Commodity Insights, this trade has generated millions of dollars in illicit revenues for Iranian-backed groups embedded in SOMO and the oil ministry.

Implications for Global Markets

Sanctions on Iraq could have widespread repercussions, particularly for China and India, the largest buyers of Iraqi crude. In October, China accounted for 41% of Iraq’s seaborne crude exports, while India took 28%, according to Commodity Insights data.

Punitive measures would also complicate Iraq’s efforts to diversify its export markets, including expanding sales to Europe and Africa. Iraqi Foreign Minister Fuad Hussein recently highlighted these ambitions but noted uncertainty over how sanctions might affect them.

Domestic and Global Challenges

Iraq’s economy is heavily reliant on oil exports, which generate 95% of government revenue. In 2022, net oil revenues reached $131 billion. Any sanctions could chill Western investment in Iraq’s energy sector, a critical component of its plans to increase crude output to 7 million b/d by 2027.

Trump’s potential sanctions could also impact US attempts to counter China’s growing influence in Iraq. Chinese firms already operate a significant share of Iraq's oil and gas development projects, far outpacing their American counterparts.

Broader Geopolitical Moves

The incoming Trump administration’s stance on Iraq aligns with its hardline approach to China and Iran. In 2018, Trump withdrew the US from the Iran nuclear deal, citing Tehran’s support for terrorism and pursuit of nuclear weapons.

In 2011, Trump declared his opposition to leaving Iraq vulnerable to Iranian control, telling The Wall Street Journal, "I would not leave Iraq and let Iran take the oil."

The Trump transition team and Iraqi Prime Minister Mohammed Shia al-Sudani’s office did not immediately respond to requests from S&P for comment.