Strait of Hormuz blockade cuts off oil revenue, Iraq's economy faces difficulties

With the Strait of Hormuz being blocked, oil revenues have dried up. Iraq’s economy, heavily dependent on oil, is facing collapse and has become the most severely affected country in the Middle East crisis.

As the second-largest oil producer in OPEC after Saudi Arabia, Iraq has made little progress in reducing its reliance on oil over the decades. Oil sales still account for 90% of its national budget revenue. Although other Middle Eastern oil-producing countries also depend on oil sales, none rely as heavily as Iraq.

This dependence has led to a collapse in oil income and an economy on the brink of collapse under a caretaker government several months after the elections.

Since the Strait of Hormuz is effectively closed, Iraq has been forced to significantly cut oil production because its exports from Basra must pass through this critical global oil transit chokepoint.

Unlike Saudi Arabia and the UAE, Iraq has no alternative export routes bypassing the Strait of Hormuz, forcing Baghdad to reduce oil output as Gulf region storage facilities and available tankers are already full.

Iraq has begun restoring northern oil export routes, transporting crude directly from the Kirkuk oil field to the Turkish Mediterranean port of Ceyhan, as the southern export route via the Strait of Hormuz has been effectively interrupted for weeks.

However, according to estimates from UK financial media, Iraq’s oil exports have plummeted from about 3.4 million barrels per day before the conflict to only around 250,000 barrels per day currently, due to heavy reliance on the southern route through the Strait of Hormuz.

Iraq’s production cuts are more severe than other Middle Eastern oil producers—within just a week of the conflict’s start, its output dropped by 70%.

For Iraq, the situation is more dire than for other Gulf oil-producing countries—its dependence on oil revenue is the highest in the region, and unlike Kuwait, the UAE, and Saudi Arabia, Baghdad does not have a large sovereign wealth fund to rely on.

Additionally, 90% of Iraq’s food, consumer goods, and pharmaceuticals depend on imports through the Strait of Hormuz, further deepening its economic crisis.