Washington’s foreign relations in the Middle East are often characterized by ebb and flow, tracking the region’s dynamic politics. But when it comes to Iraq, this ebb and flow is especially turbulent.

Events surrounding the assassination of Iranian Gen. Qassem Soleimani, the head of the Islamic Revolutionary Guard Corps Quds Force, at the beginning of the year have made clear Iraq’s fragile economic and geopolitical situation. Three years ago, Baghdad and Washington fought a fierce war against ISIS to combat the threat of international terrorism. Today, in the wake of the Soleimani assassination and its aftermath, this close relationship is now at risk of withering. In the foreground, Iraq’s energy sector has been thrown under the spotlight as Washington presses Baghdad to take swift action to ensure its “energy independence” from Iran.

Energy sector challenges

Iraq’s energy endowment, despite being the cash cow for financing the economy, is also the country’s Achilles’ heel. It contributes 60 percent of GDP, 99 percent of export revenues, and more than 90 percent of the government’s fiscal budget. This vulnerability has been exacerbated by the recent oil price collapse. Iraq’s 2020 draft budget revenues are based on a price of $56 per exported barrel with a planned deficit of 30 percent. As a price war intensifies in the oil market, the country may find itself incapable of sustaining public payroll and spending at $30 per barrel. For the last five years, Iraq has been running deficits with operating expenditures making up 75 percent of total expenses. As a result, the country may need to adopt harsh austerity measures to compensate.

Since 2003, when the Saddam Hussein regime fell, officials have failed to produce a national strategy to diversify Iraq’s economy away from oil or support the growth of the private sector. Furthermore, the cumulative effect of years of war, sanctions, terrorism, and mismanagement has made Iraq a net importer of refined petroleum products and natural gas. The latter has become a point of contention with the United States, as Iran enjoys a first-mover advantage by exporting up to 1,200 million standard cubic feet of natural gas per day (scf/d). Additionally, Iran provides around 1,200 megawatts (MW) of electricity during the hot summer months, when the demand for power peaks. While unprecedented strides were made last year, with Basra and other southern provinces being provided with an average of nearly 24 hours of power a day, the electricity sector still suffers from a supply-to-peak-demand deficit of 6,000 MW in the summer, according to analysis from the Iraq Energy Institute (IEI).