Iraq’s Oil Price Economic Collapse of 2020, Explained

Today we’re talking about Iraq, a country that’s currently having a going out of business sale. All oil must go. It turns out there was a cheaper way for countries to get a good deal on oil than invading and rebuilding a government, just ask China. So, why does this government find themselves between Iraq and a hard place? First, the problem. Iraq’s exports are about as diverse as a nineties sitcom. The product they went all in on, oil, has gone bust since the pandemic began. Lockdowns are not ideal for oil demand.

00:42 - This is such a large problem because Iraq’s oil industry is nationalized, so if that revenue goes belly up, the entire state’s finances go belly up with it. Think of the Iraqi government as more oil company and less taxing and spending entity. This oil company is going bankrupt. It’s never good when your national budget has to include the caveat that this is all only achievable if oil doesn’t go below a certain price. So, this puts Iraq in a bit of a pickle. What do you do when you have to keep paying for things, but the revenue just isn’t there? We’re not talking debates like, should we give each citizen six hundred or two thousand dollars, think more, should we pay people who work for the government salaries this month. They’re running out of cash to pay federal employees and the basic bills required of continuing to operate a government.

01:43 - It’s so bad Iran just cut off their gas over unpaid bills. Let’s just hope the people don’t give this government an eviction notice. So, now sounds like a good time for some old fashioned deficit spending, right? In America, when we debate deficit spending, it’s just assumed that… yeah, the money’s on the table if we decide to take it. Unfortunately for countries like Iraq, in order to borrow money you need someone who’s willing to lend it. Investors are in short supply for financing a small country that’s on the brink of not being able to make payments on their current debt and bills.

02:23 - So, with loans in short supply, what’s left? You can either sell a ton more oil, start devaluing cash, or make budget cuts. Iraq chose D, all of the above. First the oil sales. Iraq has one huge problem facing their goal of selling more oil, they just signed a deal with OPEC saying that they can’t increase oil sales. Not off to a great start with this first prong. So, how do you sell more oil while staying in compliance with OPEC’s restrictions? Look towards the future. I don’t mean planning ahead, I mean selling future oil shipment’s for a discount now.

03:08 - Basically, hey America, shot in the dark, I’m just guessing you’re not going to be fully by electric next year. I’ll give you a ten percent discount if you pay for next year’s oil shipments right now. Iraq is seeking an upfront payment of about $2 billion in exchange for a long-term crude-supply contract. Good news for Iraq, their seeking paid off when they found a buyer. China is now the proud owner of one year of discounted Iraqi oil. Congratulations.

03:41 - So, that two billion dollars places a nice mattress at the bottom of Iraq’s twenty story fall, but that’s still death height. Their next strategy for getting cash is a bit more painful. Iraq is intentionally devaluing their currency by twenty percent. This feeds into an innovative new way of paying government employees significantly less without docking their pay. What little cash the government of Iraq has left exists in a foreign currency reserve account, meaning it’s currently in the form of American dollars, not Iraqi Dinar.

04:19 - At the same time, they pay local contracts and federal employees using the Iraqi Dinar, not US dollars. Imagine you’re a company doing business in dollars, but you pay your employees using credits you create and control. Corporate policy says a dollar is equivalent to a credit. Good. Oh, it’s payday, so I’m going to swing by the bank and exchange twenty dollars for twenty credits. Then, here you go, 20 credits with your name on them. Ohh, it’s been a rough quarter. We changed the exchange rate. Now one dollar buys two of your credits.

04:59 - I’m going to swing by that bank and give them ten dollars, instead of the twenty I gave them last week, to buy those same twenty credits. Good news, we’re going to keep paying you the same amount of credits, so no need to burn down the government. Bad news, it’s worth half as much as it was yesterday. Some critical thinkers might be scratching their heads and thinking… I can’t put my finger on it, but something feels weird about this. Why would a bank give the government 1,190 dinars for one american dollar one day and then turn around and pay 1,450 dinar for that same one US dollar the next? That’s an extra two hundred sixty dinars per dollar just because their federal reserve announced a price hike on dollars.

05:53 - You might guess that the answer is (cocks gun). In fact, the answer lies in how Iraq handles their currency. While the US government buys and sells currency based on their open market value, Iraq uses currency pegs. This means that they artificially overvalue their currency by buying it from banks at a loss. It would be like America trying to make quarters more valuable by allowing banks to trade in three quarters for a dollar.

06:25 - All of a sudden four quarters would be worth more than a dollar, because three of them can get you that dollar. What the Iraqi government really just did was go from saying eight dimes gets you a dollar to nine dimes get you a dollar. Banks will still take that offer because they continue to profit off of those inflated exchanges, the government increases the value of each remaining dollars in their wallet, and the only one to suffer is anyone holding or getting paid in Dinar, also known as any citizen in Iraq. They saw their savings fall off the edge of a fiscal cliff, dropping 20% in the blink of an eye. The government just isn’t propping up the Dinar as much as they used to.

07:13 - Unfortunately, this reduction in currency support doesn’t seem to be panning out because Iraq’s currency reserves are already drying up. The Treasury is being forced to print money to pay for loans to the government that cover salaries and operation costs. Forget oil, soon they might be an ink based economy. The biggest obstacle to funding the government might end up being, it keeps flashing toner low… Wait, you clicked print how many times? Well, I guess we can leave the oil game and pursue our true dream of painting. The final plan for Iraq’s cash crunch is to cut costs, specifically corruption, which is getting to be a very expensive line item in the Iraqi budget.

08:04 - The one thing both Sunni and Shia leaders can agree on is, we should be padding the government payrolls with our supporters. It’s gotten to the point where federal employees earn 25% of Iraq’s entire gross domestic product. The pitch here is less, we need institutional reform, and more, hey corrupt leaders. Now’s not a great time for anyone. Can we tap on the breaks of these massively expensive schemes until the price of oil recovers. Maybe cut down our loyalist payroll to immediate family and spouses? Reformers are counting on Iraqi Leaders to recognize that this can no longer be sustained.

08:48 - Economic conditions might force the government’s hand on this one though, considering Iraq literally doesn’t have enough cash to keep paying all of their employees. So, that’s Iraq’s three pronged strategy for staying solvent until oil prices recover. Unfortunately, according to analysts, oil prices are not set to fully recover for quite some time, so fuel won’t be fueling their economy any time soon. Thank you and that’s all I have to say about that. Hello YouTube. I’d like to thank my Patrons for helping me put out my videos.

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