Beneath the sands of southern Iraq and the foothills of the Zagros mountains to the north lie the world's third-largest oil reserves. They are proven to contain at least 115 billion barrels, and the country's future depends on them. But extraction has stalled at prewar levels because of a deep rift between Baghdad and the Kurdish north over how to distribute this prodigious oil wealth.

Tensions in one major northern city recently spilt over into riots and a suicide bombing that left 25 people dead and 200 injured. Local leaders fear that there may be worse to come. Iraq therefore faces an urgent choice: to reconcile competing demands for oil money and use it to create a virtuous circle of prosperity and reconstruction; or to succumb to regional and ethnic rivalries, leave the oil industry underdeveloped, and waste the huge sacrifices by Iraqi and allied forces that have made the US-led surge a success and brought the country its best hope of long-term stability in five years.

Nowhere illustrates the deadlock jeopardising Iraq's oil-based patrimony more bleakly or concisely than Kirkuk. The city, close to the Iraqi Kurdish region but not inside it, was intensively settled with poor Arab families by Saddam Hussein to dilute Kurds' claims on its oil wealth. Since 2003, Kurds driven out under the previous regime have returned in droves, dominating regional politics and seeking unilaterally to approve contracts to develop northern oilfields. The central Government, determined that all oil revenues should flow through the Oil Ministry in Baghdad, has ruled these contracts illegal.

One result is that Iraq's total oil output remains stuck at 2.5 million barrels a day, compared with 3.5 million before the Gulf War in 1991 and a target of 4.5 million within five years. Another is that Kirkuk itself is destitute. Unemployment is between 35 and 40 per cent, modern sewers are non-existent and despair stalks the streets in a city that could be one of the richest on Earth.

Most of Iraq's untapped reserves are in the north, but 80 per cent of its output is from the south, which therefore negotiates from a position of all but unassailable strength in the bargaining over revenues. Hussain al-Shahristani, the Oil Minister, has proved powerless to end the deadlock by piloting a law governing the extraction of hydrocarbons through parliament. Without such a legal framework it has proved impossible to persuade Western oil firms to sign the short-term technical support contracts that Iraq desperately needs to boost production.

The picture is not one of unremitting gloom. Thanks largely to the improving security situation, this year's oil export revenues should be double those of 2006 and triple those of 2004. But Iraq is under pressure from the US to start paying for more of its own reconstruction, and oil accounts for 95 per cent of government income. Output therefore needs to increase further. To achieve this, Mr al-Shahristani must persuade Iraq's rival regions that their national interests come first. If he cannot, he should be replaced. A hydrocarbons law and a transparent bidding process for long-term technical support contracts must then follow swiftly.

Dividing up $70 billion of oil revenues a year is inevitably complex, but not rocket science. Iraq should be thankful and get on with it.