But as parliamentary elections loom in April, with Prime Minister Nouri al-Maliki seeking a third term amid a swelling al-Qaida insurgency raging in western Iraq, Baghdad may not be in a position to get tough right now or pick a fight with the restive Kurds and their new ally Turkey.
Analysts have long speculated that the likely outcome of the Kurds' defiance is that they could eventually declare their enclave across Iraq's three northern provinces an independent state.
The fear is that other regions, particularly the south, which contains two-thirds of Iraq's oil reserves of 143.1 billion barrels, will also want greater autonomy from a regime in Baghdad that analysts say is increasingly autocratic and claims sole control over resources.
The long-dispossessed Kurds began exporting oil from their enclave, which they say contains at least 45 billion barrels of oil and 110 trillion cubic feet of natural gas, in 2013 in a modest way, trucking 30,000 barrels per day to Turkey.
Now they have the capacity to pump 400,000 bpd through a new pipeline built by Turkey that bypasses Iraq's state-run oil network and runs to Turkey's Ceyhan export terminal on the Mediterranean, rising to 1 million bpd by 2016.
The Kurds' deal with Turkey, and a widening Ankara-Baghdad rift, highlight the way in which regional alliances are being reshaped as Turkish Prime Minister Recep Tayyip Erdogan seeks to transform his resource-poor country into the key regional energy hub. Erdogan is even making peace with his own separatist Kurdish minority.
It also opening up new intrigues.
"The breach is real," Steven Cook, a Mideast specialist with the Council of Foreign Relations, a New York think tank, wrote in Foreign Policy.
He says growing distrust between Ankara and Baghdad has reinforced Turkey's determination to obtain energy from Kurdistan.
Iraq's 3 million Kurds, who achieved self-rule in 1992 under the U.S.-led coalition that liberated Kuwait from Saddam Hussein's clutches, have long sought their own state.
The discovery of oil there after the 2003 U.S.-led invasion toppled Saddam gave them a firm economic base for that long-cherished dream.
The Kurdistan Regional Government in Erbil, the enclave's capital, has its own army, the much-feared mountain fighters known as Peshmerga -- which translates to "those who face death." The turbaned warriors fought Baghdad for decades under leader Mullah Mustafa Barzani.
He ruled the short-lived Mahabad Republic, the only Kurdish state there ever was, when the Russians pulled out of Iran after World War II, and founded the Kurdistan Democratic Party, one of the main Iraqi Kurdish groups.
Mullah Mustafa died in the United States in March 1979. But his son, Massoud, an-ex guerrilla himself, is now president of the KRG, while his grandson, Nechirvan, Massoud's nephew, is prime minister.
The KDP's partner in Kurdistan is the Patriotic Union of Kurdistan, headed by Jalal Talbani, the Iraqi president.
But the tribally oriented KDP, which controls the northern part of Kurdistan, and the more urban PUK have a history of rivalry that led to years of open warfare between them.
The most recent was an all-out civil war in 1994-96, during which the KDP reached out to Turkey for support while the PUK took help from Tehran.
Analysts see this rivalry as something Maliki, and his allies in Iran who also oppose an independent Kurdistan, could exploit to undermine the Kurdish enterprise.
Friction between the factions has flared again as the Barzanis' power has grown at the expense of the PUK, whose influence has waned with Talabani's failing health.
"The sharpest tools Iran and ... Baghdad have to undermine Turkey's alliance with the KRG are the Kurds themselves," said analyst Reva Bhalla of the U.S. global security consultancy Stratfor.
"The political lines dividing Peshmerga forces remain sharper than ever," she noted. "The cracks in the Kurdish landscape will be exploited the more competition grows between Turkey and Iran. ...
"The influx of oil money into an already highly corrupt and competitive leadership, a growing imbalance of power among the main Kurdish parties and a developing rivalry between regional forces Turkey and Iran will apply enormous stress on the Kurds' brittle union."