Iraq’s energy crisis has exposed serious risks to the country’s economic stability. A new analysis from the American University of Iraq, Sulaimani, calls for major reforms. The study examines weaknesses in oil exports, electricity, gas supplies, and public finances.
The August edition of the Iraq Energy Outlook examines the impact of the 2026 regional crisis. It focuses on disruptions around the Strait of Hormuz and their effect on Iraq. The analysis warns that Iraq remains heavily dependent on oil revenues and one major export route.
Iraq energy security faces growing pressure because most crude exports depend on Gulf shipping routes. Any disruption can quickly reduce export revenues and increase financial pressure. During the latest crisis, shipping restrictions forced Iraq to reduce southern oil production.
The analysis urges Baghdad to develop additional routes for exporting crude oil. Turkey, Jordan, and Syria could offer alternative land corridors for Iraqi exports. The study also suggests exploring routes through Jordan and Egypt toward Mediterranean markets.
One major recommendation involves accelerating the Basra-Haditha pipeline project. The pipeline could provide Iraq with another route for moving crude toward western markets. The report also calls for resolving energy disputes between Baghdad and Erbil.
Electricity represents another major challenge for Iraq. Peak demand could exceed 55 gigawatts during 2026, according to the analysis. However, available electricity generation remains below 20 gigawatts, creating a potential gap of more than 35 gigawatts.
The study argues that Iraq’s power crisis involves more than insufficient generation capacity. Fuel shortages, weak efficiency, poor management, and distribution losses also affect the sector. Therefore, building more power plants alone may not solve the country’s electricity problems.
Iraq produced about 166 terawatt-hours of electricity in 2024. Yet customers received only around 67 terawatt-hours of that production. Distribution losses reached roughly 82 terawatt-hours, highlighting major weaknesses across the electricity network.
Gas supplies create another vulnerability for the Iraqi power sector. Iranian gas has historically provided more than 40% of the fuel used for electricity generation. However, supply has become less predictable because of sanctions, regional tensions, and Iran’s domestic demand.
The analysis also highlights Iraq’s failure to fully capture its associated gas resources. Iraq continues to burn significant quantities of gas while importing fuel for power generation. Expanding domestic gas processing could reduce imports and improve energy security.
Iraq energy security also remains closely connected to government finances. Baghdad has avoided a deeper fiscal crisis through domestic borrowing and treasury instruments. The government has also adjusted spending and delayed some payments to manage financial pressure.
However, the study describes these measures as temporary solutions. They provide the government with additional time but do not solve its dependence on oil revenues. A sustained economic strategy would require broader sources of income and stronger non-oil sectors.
Energy subsidies also place significant pressure on public finances. Explicit fossil-fuel subsidies exceeded $8 billion in 2025, according to the analysis. Although that figure declined from 2022, it remained almost three times higher than the level recorded in 2016.
China’s expanding role in Iraq’s energy industry also receives attention in the report. Chinese companies have increased their involvement in oil production, infrastructure, electricity, and trade. The analysis warns that Iraq should avoid creating an excessively dependent economic relationship with Beijing.
Security also forms part of the country’s energy challenge. The study calls for stronger state control over armed groups operating outside official command structures. It also recommends stronger action against oil-smuggling networks.
Iraq energy security therefore requires more than expanding oil production or building additional power plants. The country needs stronger export networks, reliable fuel supplies, efficient electricity distribution, and better governance. Diversifying government revenues could also reduce the impact of future regional crises.
Iraq possesses some of the world’s largest energy reserves. However, those resources cannot fully protect the economy without stronger infrastructure and effective management. The latest crisis has shown Baghdad the risks of relying too heavily on one commodity and limited export routes.
For Prime Minister Ali al-Zaidi’s government, the challenge extends beyond producing more energy. Iraq must build an energy system that can withstand regional disruptions and protect public finances. Such reforms could strengthen economic stability while supporting long-term national development.