Editor's Note: The conflict in Iraq is escalating beyond all hope of control - and it's impacting a huge number of investments worldwide. So we reached out to Dr. Kent Moors, one of very few people who've advised both the Kurdish regional and Iraqi federal governments.
What he told us was incredible, bringing crystal clarity to what had been an extremely murky picture.
More importantly, Kent's showed us a way forward through the supply crisis and, as we'll see shortly, a way to profit from it.
Money Morning: Some of the first news we heard out of Iraq about the current crisis was from the north in Iraqi Kurdistan, specifically the city of Kirkuk. What is the significance of the armed conflict there, relative to the federal government in Baghdad? Kurdistan and Baghdad, historically, have had a poor relationship, but now it would seem they have a common enemy in the Islamic State of Iraq and Syria.
Dr. Kent Moors: Kirkuk has been a bone of contention for some time, and the Kurds have always regarded Kirkuk as the natural capital of Kurdistan, a geopolitical region in northern Iraq where the Kurds are the ethnic majority.
This goes back hundreds of years. But if you go back maybe 40 or 50 years ago, Kirkuk was also one of the most interesting cities in the Middle East. It was very diverse, with large Asian, Turkmen, and Jewish communities. It was a very different, cosmopolitan kind of Middle Eastern city.
When Saddam Hussein was in power, he started physically displacing Kurds and moving in Iraqi Arabs, to change the population.
MM: How has the city changed since Saddam Hussein was deposed?
Kent: Well, when he finally fell, the Kurds started moving a Kurdish population back into Kirkuk.
And Kirkuk is the center of northern oil production.
From there you have a primary, major, two-pipeline export system to Ceyhan in southeastern Turkey. Virtually all of it is outside of Kurdistan and part of Iraq. When it came to protecting Kirkuk, the Kurds contended, "Look, the Iraqi security forces just laid down their arms, took off their uniforms, and left."
The Kurds and their Peshmerga militia are providing a useful service. And by retaining Kirkuk, they're maintaining the integrity of about 20% of the oil exports.
Baghdad flatly rejects - and has always flatly rejected - that Erbil, which is the provincial capital in Kurdistan, has any right to export on its own, or has any right to provide leases or contracts on its own. All that had to be through the central government.
So given the fact that I was advising both the Ministry of Petroleum in Baghdad and the Ministry of Natural Resources in Erbil, I really had to stay out of that.
The Kurds have been playing this game for 3,000 years. They're very good at this sort of jockeying diplomacy. You have to remember, the Kurds are the largest ethnic population in the world that don't have their own country.
Eastern Turkey, northwestern Iran, and the Kurdistan Regional Government area in Iraq... That's all Kurdish.
Now to get into eastern Turkey, those Kurds are very radical, they blow up pipelines - all kinds of nasty things.
The Turks have had military operations within their own borders against the radical Kurds, the Koma Civakên Kurdistan (KCK), for some time, so there was animosity in the Turkish government in Ankara against Kurdistan.
But... they both so hate Nouri al-Maliki, the Shiite-leaning prime minister of Baghdad, that they've buried the hatchet and they're now aligned.
MM: And how long has that Kurdish/Turkish alignment existed?
Kent: Within the last three years. Now there was a deputy prime minister, Tariq al-Hashimi, in Baghdad, that al-Maliki claimed was actually a terrorist - a Sunni terrorist. And he was convicted in absentia, but he ended up living in exile in Turkey.
So Baghdad demanded extradition from Ankara, and Ankara said no. At that point the Kurds intervened and got on one side and said to the Turks something like, "If you hate al-Maliki you're a friend of all Kurds, regardless of what else you stand for."
There is an intense hatred of al-Maliki here.
The Kurds have since moved two consignments of their own oil to Ceyhan. They're sitting there waiting for tankers to move them out, but Baghdad still claims it's Iraqi oil, not Kurdish oil.
So Baghdad's not going to give up here. Baghdad argues that all oil exports have to be approved by the government and they're part of the central government's budget.
MM: Was that done as ISIS advanced? And what does this mean for the overall ability of Iraq to export oil?
Kent: This was before ISIS showed up... before, really, ISIS moved. This has been going on over a month since they've had that oil there.
Now if you take a look at the Kurdish side internally, they came up with their own production-sharing agreements and their own contracts that are better than the central government's.
But Baghdad has turned to major internationals and said, "If you work in Kurdistan, we invalidate all your contracts in Iraq."
So 80% of the oil is in the rest of Iraq, but Kurdistan cuts a better deal for international companies than Baghdad does.
Kent will follow this ongoing crisis for as long as it takes. You can get all of his Oil & Energy Investor updates - including alerts on how to profit from this critical supply situation. Click here, and you'll receive Oil & Energy Investor twice per week, plus any special situational profit alerts Kent sends.