Shafaq News

Iraq is confronting one of the most serious economic shocks in years as the closure of the Strait of Hormuz —triggered by escalating tensions between Iran, the United States, and Israel— threatens to choke off the country’s primary source of income. With nearly all Iraqi oil exports passing through the narrow waterway, analysts warn that the disruption could rapidly evolve into a financial crisis with repercussions for public spending, economic stability, and domestic security.

The shock is already visible in production figures. The shutdown of the Rumaila oil field, which produces around 1.4 million barrels per day, alongside halted output in the Kurdistan Region estimated at roughly 200,000 barrels daily, is costing Iraq about $128 million each day. Over a month, the losses could exceed $3.8 billion, a major blow for a country where oil accounts for nearly 90 percent of government revenues.

Beyond the immediate financial hit, a prolonged disruption could quickly strain Iraq’s fragile economic balance. Millions of Iraqis depend on public-sector salaries that are funded almost entirely by oil income. Any delay in these payments would ripple through the economy, weakening consumer demand and placing pressure on small businesses reliant on imports and domestic spending. Rising inflation, combined with shortages of essential goods, could deepen social tensions in a country where economic grievances have repeatedly fueled waves of protest.

Read more: Iraq braces for financial meltdown amid Hormuz closing threats

The Petro-Noose

Iraq’s vulnerability stems from its overwhelming dependence on a single export corridor. More than 94 percent of Iraqi crude exports typically move through southern ports into the Strait of Hormuz, the narrow passage connecting the Arabian Gulf with the Gulf of Oman.

Despite its limited width, the strait carries roughly 34 percent of global seaborne oil shipments and around 30 percent of liquefied natural gas trade, making it one of the world’s most critical energy chokepoints. Recent ship-tracking data shows dozens of tankers halted on both sides of the passage, leaving the normally crowded corridor almost empty.

For Iraq, sitting at the northern edge of the Gulf, the strait represents far more than a shipping lane —it is the economic artery of a rent-dependent state.

Financial adviser to the Iraqi Prime Minister, Mudhir Mohammed Saleh, warned that exports could fall from more than 3.4 million barrels per day to less than 250,000 barrels per day, dramatically reducing the country’s foreign currency inflows. Even if global prices surge to $150 per barrel, he noted, Iraq could still lose between $200 million and $255 million daily, while monthly revenues could collapse from roughly $7 billion to about $1 billion, covering only 25–30 percent of operating expenses.

Iraq’s oil revenues are deposited in accounts at the US Federal Reserve, meaning any slowdown in exports immediately constrains the supply of dollars entering the domestic financial system. “Any slowdown increases demand for dollars as a safe-haven asset, potentially destabilizing the dinar,” Saleh explained.

Read more: Iraq’s oil lifeline under pressure: US-Iran war reshapes Baghdad’s economic calculus

Searching For Alternative Arteries

Facing mounting losses, Iraqi authorities are examining emergency export alternatives to mitigate the crisis.

Abdul Sahib Bazon al-Hasnawi, spokesperson for the Ministry of Oil, told Shafaq News that the government is studying several options to maintain crude shipments through safer routes. These include increasing flows through the Iraq–Turkiye pipeline to the Ceyhan terminal, reviving the Baniyas pipeline toward Syria, and expanding overland tanker exports through Jordan.

Longer-term proposals under review include constructing storage facilities outside the Strait of Hormuz —including possible use of Oman’s Duqm port— as well as reviving the Iraqi-Saudi pipeline network. While some of these projects remain strategic plans requiring technical studies and investment, al-Hasnawi pointed out that contingency strategies aim to preserve exports of up to three million barrels per day through a combination of routes if maritime disruptions persist.

Yet these alternatives face immediate logistical constraints. Iraq’s southern oil output has already dropped to between 800,000 and 1.3 million barrels per day, down from roughly 4.3 million barrels before the regional escalation, after storage facilities reached capacity and tankers stopped arriving at export terminals.

The northern export corridor has also come under pressure, as oil flows from fields in the Kurdistan Region and Kirkuk to the Turkish port of Ceyhan, previously around 200,000 barrels per day, were temporarily halted after production was suspended at several fields inside the region. A recent drone strike on the Sarsang field in Duhok, operated by the US company HKN Energy, caused a fire and halted production of roughly 30,000 barrels per day, underscoring the vulnerability of Iraq’s remaining export infrastructure.

Read more: Iraqis rush to stock food and medicine as regional war fears grow

Economic Stress And Security Risks

A prolonged revenue disruption could also destabilize Iraq’s political equilibrium. The country’s governing system relies heavily on public spending to sustain political alliances, maintain provincial budgets, and fund security forces. Any sharp decline in revenues could intensify competition among political factions over shrinking resources while increasing pressure on Baghdad from regional authorities seeking guaranteed budget transfers.

Analyst Ahmed Al-Sharifi noted that security spending poses another challenge because maintaining Iraq’s military capabilities requires substantial funding, including operating advanced equipment such as the country’s F-16 fighter fleet, which costs more than $350 million annually to sustain. In the event of an economic downturn, the government could face the difficult task of balancing fiscal discipline with the need to maintain security readiness.

Economist Ahmed Eid suggested a three-pronged strategy to manage the crisis: gradually adjusting production to avoid operational damage to oil reservoirs, using internal financial tools such as treasury advances and government bonds to maintain salaries and essential services, and coordinating monetary policy to stabilize the exchange rate and ease speculative pressure on the dinar.

He warned that prolonged disruptions would likely raise prices for medicines and essential goods and force Iraq to explore unconventional export methods, including expanded tanker shipments to Jordan and long-term supply contracts, despite the security risks to storage facilities and transit infrastructure.

Read more: Iraq braces for financial meltdown amid Hormuz closing threats

Iraq’s Brittle Shield

Despite the severity of the crisis, Saleh said the country retains short-term buffers. Foreign currency reserves cover more than a year of imports, while strategic stocks of key commodities could last up to two years, noting that oil revenues typically arrive two months after sales, meaning salaries for March and April are already funded, giving authorities roughly 60 days before serious treasury pressure begins to emerge.

Yet restarting production after prolonged shutdowns can be technically complex. “It’s not like turning off a car engine,” Saleh cautioned, explaining that oil reservoirs can suffer damage if production stops suddenly, requiring costly repairs and time to restore normal output.

For now, Iraq is confronting the structural limits of an economy built around a single export corridor. If the Strait of Hormuz remains closed for an extended period, the country may face economic crisis and strategic reckoning over the fragility of its energy lifeline.

Written and edited by Shafaq News staff.