Baghdad (IraqiNews.com) – Iraq must undertake fundamental changes in its oil, power, and gas sectors after the 2026 regional crisis revealed severe weaknesses in the country’s energy-dependent economy, according to a new analysis from the American University of Iraq, Sulaimani (AUIS).
The August issue of the Iraq Energy Outlook, published by the university’s Dhia Jafar Center for Energy & Natural Resources, investigates how regional violence and interruption across the Strait of Hormuz affect Iraq’s oil exports, government finances, and electrical grid.
The analysis cautions that Iraq remains dangerously dependent on a single commodity and a single major maritime export route, with disruptions to the Strait of Hormuz fast translating into fewer oil revenues and financial pressure on the government.
That vulnerability was highlighted during the 2026 crisis, when constraints on shipping through Hormuz led Iraq to reduce southern oil output and declare force majeure at foreign-operated assets.
The report contends that Iraq should now prioritize diversifying its oil export channels as a national economic and security imperative. When Gulf shipments are hindered, other outlets such as Turkey, Jordan, Syria, and perhaps the Mediterranean may become available.
Among its recommendations to Prime Minister Ali al-Zaidi’s government are to accelerate the Basra-Haditha pipeline, resolve energy disputes between Baghdad and Erbil, and develop potential land corridors through Jordan and Egypt that could eventually provide Iraqi crude access to the Mediterranean without passing via Hormuz.
The research also identifies severe issues with Iraq’s electrical system.
Peak power demand in 2026 is expected to surpass 55 gigawatts, while available supply remains below 20 GW, resulting in a probable shortage of at least 35 GW.
Despite years of investment in generating capacity, the research contends that Iraq’s electrical crisis is more about fuel security, efficiency, and governance, rather than just constructing more power plants.
Distribution losses are quite significant. Iraq generated around 166 terawatt-hours of power in 2024, but only about 67 TWh went to customers.
Around 82 TWh was lost at the distribution level alone, which means that roughly half of all energy produced was never paid to consumers.
Dependence on Iranian gas is another significant danger. Iranian supplies have traditionally contributed more than 40% of the fuel used in Iraq’s power production, but deliveries have grown more unpredictable due to sanctions, regional instability, and Iran’s own internal needs.
The report also highlights Iraq’s ongoing use of substantial amounts of associated gas while importing gas for power production, emphasizing the need to expand local gas processing capability.
Baghdad has so far avoided a full-fledged fiscal catastrophe by borrowing domestically, issuing treasury notes, making budget changes, and delaying payments.
However, the study sees these steps as transitory remedies that give the government time rather than addressing Iraq’s core reliance on oil income.
Energy subsidies are another significant expense.
Explicit fossil-fuel subsidies were predicted to be over $8 billion in 2025, almost three times their 2016 level, albeit dropping from a high of around $14.5 billion in 2022.
The report also discusses China’s growing role in Iraq’s energy industry, noting Beijing’s increasing involvement in oil production, infrastructure, electricity, and trade, but cautions that the relationship risks becoming increasingly unbalanced if Iraq becomes significantly more dependent on China than China is on Iraq.
Security is also recognized as a component of Iraq’s energy crisis.
The research advises putting armed formations, especially PMF-linked militias operating outside the official line of command, under effective state control and destroying oil-smuggling networks.
Taken together, the report portrays the 2026 problem as a warning to Baghdad.
Iraq has some of the world’s greatest energy reserves, but its economy remains fragile as long as the government’s finances are heavily reliant on oil, most crude exports are dependent on a single maritime corridor, and the electrical grid is sensitive to imported fuel and enormous network losses.
For the Al-Zaidi administration, the problem is no longer only generating more energy but also developing an energy infrastructure capable of defending Iraq’s economy when the next regional crisis strikes.