Given the political turmoil inside Iraq as it struggles to form a coalition government seven months after an inconclusive parliamentary election produced no clear-cut winners, this energy rivalry could yet have geopolitical consequences that could threaten regional stability.

Saudi Arabia, the world's largest producer, holds a seemingly unassailable dominance within the Organization of Petroleum Exporting Countries.

But the rivalry between Iran and Iraq is who will hold the No. 2 slot in terms of production capacity.

Iraq, after signing 20-year production contracts with a host of international oil companies in 2009 to boost its laggardly output, announced Oct. 4 that it upgraded its oil reserves from 115 billion barrels to 143.1 billion.

That was a 24 percent hike, which vaulted Iraq over Iran in the reserves standings and put it behind Saudi Arabia and Venezuela in terms of conventional oil reserves.

A week later, Tehran responded by boosting Iran's reserves from 138 billion barrels to 150.3 billion, a 9 percent increase, and said the figure was likely to go up again before the end of the Iranian year in March 2011.

That put Iran back up there as the No. 2 producer after Saudi Arabia.

Iran's current output, despite U.S., U.N. and EU sanctions, is pegged at 3.7 million barrels per day while Iraq's stands at around 2.4 million bpd.

It is production levels that determine OPEC's pecking order rather than reserves, although Iraq is believed to have as much as another 100 billion barrels oil in untapped reservoirs.

Iran is unlikely to be able to improve its production rate, largely because the international sanctions prohibit foreign investment in the Islamic Republic's energy sector, mainstay of its economy.

Iran, like Iraq, seeks larger amounts of outside investment because it cannot afford to pay for upgrading its badly rundown energy infrastructure.

But Iraq is doing just that and plans to boost production to as much as 12 million bpd by 2017.

That would surpass Saudi Arabia's current production capacity of around 10 million bpd but it is widely believed within the global energy industry that Baghdad is unlikely to achieve that target in the foreseeable future -- and may never will.

"The potential is there but converting it to actual is complicated," observed Manouchehr Takin, senior analyst at the Center for Global Energy Studies in London.

"We don't believe it's achievable," said Patrick Gibson, an oil supply analyst at the Wood, Mackenzie consultancy, primarily because Iraq's energy infrastructure also is woefully inadequate to permit such a giant leap.

Gibson told the Financial Times that Iraq could push output up to 7.5 million bpd within the timeframe set by Baghdad, while 5.3 million bpd was "a fully risked estimate."

But, most significantly, he said, "We don't see Iranian production going anywhere in the next five years."

So at some point, probably in the not-too-distant future, Iraq will overtake Iran's production level and gain greater authority within OPEC.

However, if Tehran succeeds in getting a Shiite-dominated, pro-Iranian government installed in Baghdad, it would have immense influence in dictating Iraq's energy policy and controlling its production level.

Two-thirds of Iraq's oil reserves lie in the Shiite-dominated south, which borders Iran. These would be highly vulnerable to Iranian pressure.

The other one-third lies in the northern Kirkuk fields, which Iraq's Kurdish minority claims is part of its semi-autonomous enclave. In such a volatile environment, those fields too would be vulnerable.

The Financial Times noted Iraq's status within OPEC would have to change drastically if its output level is substantially increased.

Iraq hasn't been assigned an OPEC production quota -- these allow the cartel to exert some control over world oil prices -- since Saddam Hussein invaded Kuwait in 1990.

"As Iraq's output grows, this position will become untenable," the Financial Times reported.

Takin said the critical point would be when Iraqi production hit 3.5 million-4 million bpd.

"Then they'll say to the Iraqi minister, 'Your excellency, the time has come for you to join our quotas. If you don't then prices will fall and we'll all lose.'"

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