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OPEC鈥檚 second largest oil producer is in severe disarray just as the world has come to rely upon Iraq for greater energy supplies.

Iraq is facing its biggest security threat in years following a surprise attack by Sunni militants聽on Mosul. In the June 10 attack on Iraq鈥檚 second largest city, members of the Islamic State of Iraq and Syria (ISIS) surprised Iraq鈥檚 security forces, driving them out and storming military bases, police stations and the provincial governor鈥檚 headquarters.

Government security forces聽shed their uniforms聽to avoid capture and abandoned their posts as Prime Minister Nouri Al-Maliki declared a state of emergency in the entire country. Eyewitness聽reports聽said civilians were streaming out of Mosul, fleeing the violence.

The attack by the militant Sunni group is not the first. In January, ISIS attacked聽Ramadi and Fallujah聽in Anbar province, briefly taking control of the cities entirely. Despite Maliki鈥檚 attempts to pacify the region, ISIS has retained control of some territory in Anbar.

Iraq has been deeply divided, with Maliki鈥檚 government becoming increasingly authoritarian. Sunni groups claim that Maliki discriminates and聽unfairly targets聽them. But the problem appears to be a cycle of fear and distrust; as Sunnis resist oppression and increasingly take to the streets, Maliki tries to strengthen his position by cracking down. (Related Article:聽Oil Prices Likely To Rise Without More Middle East Investment)

The January attacks by ISIS came after Maliki聽bulldozed聽a Sunni protest encampment in Ramadi, and intentionally conflated Sunni protestors with Al-Qaeda terrorists. Support for his government vanished in Anbar and Maliki鈥檚 security forces withdrew as a result, paving the way for an ISIS takeover. (For a detailed rundown of the events that led to the crisis, read Kirk Sowell鈥檚聽exhaustive piece聽in聽Foreign Policy聽from earlier this year).

Now that the insurgency has spread to Mosul, the future of Iraq has again been thrown into question. Maliki鈥檚 emergency decree聽may not matter much. He already has consolidated enough power to act but has shown an inability to quell the violence.

The turmoil in Mosul threatens to upend some of Iraq鈥檚 oil production. Most of Iraq鈥檚 oil is located in the south near Basra, but there are significant oil fields near Mosul, as well as in nearby Kurdistan. Perhaps more importantly, the fighting in Mosul has聽brought to a standstill聽the repairs to Iraq鈥檚 main oil pipeline to Turkey.

Moreover, the violence could threaten future investment in the country, which has plans to triple its oil production by the end of the decade. The phenomenal level of investment required to achieve such a feat will not happen in a country suffering from severe violence. 鈥淭aking over Mosul will likely halt investment in oil and gas in that area,鈥� Paul Sullivan, a Middle East expert at Georgetown University, told聽Bloomberg News. 鈥淲ho wants to drop hundreds of millions or billions in a place where ISIL could attack at any moment?鈥�

One additional development that is complicating Iraq鈥檚 oil picture is the central government鈥檚 relationship with Kurdistan. After a second ship full of Kurdish oil left from the Ceyhan port in Turkey on June 9, an Iraqi government representative said that it would聽bring a complaint聽to the United Nations.

The move comes even as uncertainty shrouds the ultimate destination of both tankers. The first ship still has not docked 鈥� it initially traveled towards the U.S. Gulf Coast, but reversed course and is near the shore of Morocco. While the violence in Mosul is an acute threat to Iraq鈥檚 oil industry, the lingering political conflict with Kurdistan is also holding back Iraq鈥檚 potential as an oil exporter. (Related Article:聽Kurdish Oil Looks For Buyers As Baghdad Warns Them Away)

As I mentioned in my June 9 piece,聽OPEC is currently meeting聽in Vienna to discuss its output quota, which is expected to remain unchanged. But the oil supply picture is becoming more strained than experts predicted only a few short months ago.

Iraq intended to lift its oil production to over 4 million barrels per day (bpd) this year, but that seems unlikely at this point, especially given what鈥檚 happened in Mosul. After hitting a 35-year high in February at 3.6 million bpd, production slipped the following month by almost 300,000 bpd. With other OPEC members also losing output, OPEC may need to rely upon Saudi Arabia to make up for any shortfall later this year if demand rises.

As oil markets have tightened, prices have climbed. WTI is聽up more than 10 percent聽since the beginning of the year, from $93 per barrel in January to over $103 in June. Brent prices are up a more modest 3 percent, from $106 per barrel to $109.

If Iraq鈥檚 security situation continues to deteriorate, it is not inconceivable that some of its production would be knocked offline. The world has come to take Iraqi oil for granted, and a significant loss of production would send prices skyrocketing.

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