Haidar Al Abadi, a senior legislator, has warned the government's projected 2014 budget will fall apart if Kurdistan does not hand over revenue from independent oil exports to northern neighbor Turkey that began recently.
Such action by the Kurdistan Regional Government, which is defying the Baghdad regime of Prime Minister Nouri al-Maliki by pursuing its own oil and gas exports outside the Oil Ministry's control, will leave the central authority no option but to halt all state spending in the enclave. Kurdistan's share amounts to around 17 percent of overall state expenditure.
The loss of that revenue could be crippling, unless the KRG, which the federal government accuses of acting illegally, can generate enough income from oil sales to sustain itself.
The KRG says the first 2 million barrels of crude, primarily from Kurdistan's Tawke field, through the newly constructed pipeline that began operating in early January, will be sold at the end of the month.
The Kurds are expected to pump 4 million barrels to Turkey's Ceyhan export terminal on the eastern Mediterranean by February.
Abadi said the draft budget for this year will have a deficit of around $18 billion because of a sharp rise in state spending.
The deficit was calculated on the premise that the KRG would hand over revenue from oil exports of 400,000 barrels per day, although the current level is only about 225,000 bpd.
"They're not contributing, so why should they get something out of it?" he declared.
Time is running out, he stressed. The new budget must be approved before parliament is dissolved in advance of elections scheduled for April 30.
It's not known how the Kurds will respond, but they have a lot riding on this energy boom, which could lead them to declare the independent state they have long sought and fought for.
The dispute between Baghdad and the KRG in Erbil, political capital of the Kurdish zone that spans three northern provinces, is moving into dangerous ground.
Neither side is inclined toward compromise against the backdrop of renewed insurgency, in which al-Qaida jihadists seized the western towns of Fallujah and Ramadi Dec. 30 and declared an Islamist emirate.
The last thing Maliki can afford as he seeks a third four-year term is an open conflict with the hardy Kurds who fought Baathist rule for five decades and are also locked in a face-off with Baghdad over control of the oil-rich Kirkuk region.
Lurking in the background is the expectation that once the Kurds, who have their own military forces, become economically viable through their energy reserves they'll break away from the federal Iraqi state, possibly triggering its eventual breakup.
Baghdad threatened this month to boycott Turkish companies and cancel contracts with Turkish firms as the rift with the Kurds and their new energy patron intensified.
Turkey has no energy resources, so the Kurds will be providing low-cost energy for domestic consumption, but Ankara's prime goal is transforming itself into the key energy hub between Russia, the Caspian, the Middle East and Europe.
The 4 million Kurds are sitting on, by their tally, 45 billion barrels of oil. These are listed as part of Iraq's reserves of 143.1 billion barrels, the world's fifth-largest reserve of conventional oil. Kurdistan has natural gas reserves of 110 trillion cubic feet.
The Kurds' deal with Turkey in November calls for Kurdish oil exports of as much as 2 million bpd and 454 billion tcf of gas.
The Woods MacKenzie energy consultancy of Edinburgh, Scotland, estimates most of the Kurdish reserves remain untapped, with only 12 billion barrels of oil and 24.5 tcf of gas so far discovered.
Iraq is currently producing 2.9 million bpd, with exports totaling 2.4 million bpd. Its plan to push production to 3.4 million bpd by year-end is starting to falter.
The Oil Ministry has already lowered its production targets for the next few years, mainly because these were, as industry analysts warned, far too ambitious.
This has made finding a settlement of the potentially explosive dispute with the Kurds all the more urgent.