The dispute is made all the more critical since the minority Kurds, whose ultimate aim, though not publicly stated, is an independent state anchored on oil reserves, are sitting on what energy industry experts say are vast untapped oil fields.
Northern Iraq contains around one-third of the country's reserves of 143.1 billion barrels of oil.
The Kurds say the region run by the Kurdistan Regional Government, which covers three of Iraq's 18 provinces, could contain as much as 45 billion barrels.
This, says the Middle East Economic Digest, along with "the fact that Kurdish politicians are effectively kingmakers in Baghdad … is making Erbil more powerful."
The Kurdish region, badly neglected during the rule of Saddam Hussein, is locked a long-running dispute with the federal government in Baghdad over oil contracts the KRG has signed with 20 foreign oil companies since 2006.
But Baghdad doesn't recognize the contracts and, since Iraq's fractious Parliament is unable to agree on a badly needed hydrocarbon law to regulate national energy resources and revenue-sharing, that's unlikely to change in the near future.
The Kurds oppose the current draft because it would give Baghdad greater control over Kurdish oil.
In September, the Kurds halted oil exports totaling some 160,000 barrels per day via the pipeline from the Kirkuk oil fields to Turkey's Ceyhan terminal on the Mediterranean, apparently seeking to pressure Baghdad to review its position on the proposed oil law.
That didn't work, since the Shiite-dominated government in Baghdad can easily make up the shortfall by boosting production in the Rumaila mega-field in the south.
In the meantime, the KRG continues to pursue its own ambitious -- and independent -- energy program, even though the new oil law, if it ever makes it to the statute book, would restrict this.
"In the space of four years we've increased production from a standing start to about 200,000 barrels per day by the end of this year," Saad Sadollah, commercial adviser at the KRG's Ministry of Natural Resources, said earlier this month.
The Erbil administration plans to raise that to 1 million bpd by the end of 2015, as well as expand its infrastructure.
"Major international companies are becoming interested in the development of Kurdistan's oil reserves and this is testament to the fact that we're pursuing an economically and legally viable way of developing those reserves," KRG Prime Minister Barham Salih told MEED.
But the most inflammatory issue in the dispute between Erbil and Baghdad is the city of Kirkuk and its oil fields.
The Kurds claim these are historically part of Kurdistan, which Saddam Hussein sought to Arabize as part of his effort to crush a long-running Kurdish rebellion, forcibly expelling Kurdish inhabitants and replacing them with Arabs.
Baghdad refuses to relinquish Kirkuk or the oil fields, which the Kurds want to provide the economic base of the independent homeland they've dreamed of for decades.
A referendum to decide Kirkuk's future was scheduled for 2007 but it has yet to be conducted because of fears it would trigger bloodshed.
Tension remains high there. Government forces and Kurdish fighters face each other along the boundaries between Kurdistan and Arab regions.
There were occasional clashes but the presence of U.S. troops in Iraq prevented large-scale fighting. Now those troops are being withdrawn under the U.S. pullout scheduled to end Dec. 31.
Frustrated by delays over the oil law, the KRG is driving to attract more foreign oil companies despite Baghdad's bitter opposition.
In the final analysis, the dispute between Baghdad and Erbil has wider ramifications that don't auger well.
Two-thirds of Iraq's known oil reserves lie in the south, where there have been rumblings for autonomy among the Shiite majority.
Although that seems to be on hold for the time being, if the southerners feel hard done by over the oil law that could change. They could even decide to pump their oil eastward through neighboring Shiite Iran.
And in Anbar province in western Iraq, which has a large Sunni population and where a new oil field was recently discovered, there have been calls for greater regional control of resources.