Chalabi, who has been improving his relations with Washington after falling out with the US administration, was appointed acting oil minister after the incumbent Ibrahim Bahr al-Uloum was given leave, officials said on Friday.
His takeover coincided with long lines forming at petrol stations in Baghdad, as words spread that Iraq's largest oil refinery had shut down and a crippling petrol shortage was inevitable.
Chalabi, who supported Uloum for the post when a US-backed government was formed earlier this year, is already the head of the Oil Council, a cabinet-level board, and his influence on Iraq's economic and commodities policy is massive.
Intent on resigning
Uloum told Reuters he was "intent on resigning" while aides to Chalabi, a former financier, confirmed that he had been appointed acting oil minister.
"I object to the decision of putting me on leave and the mechanism by which it was done after I objected to the government's decision to raise fuel prices," Uloum said.
Unrest is growing over a recent
increase in fuel prices
The son of a prominent Shia theologian, Uloum has been directing the ministry's efforts towards solving fuel shortages triggered by sabotage and breakdowns that plagued Iraq since Saddam Hussein was removed from power more than two years ago.
A ministry spokesman allied to Uloum said the country was facing what he called an impending oil supply crisis.
"Production in the north, centre and south is about to suffocate," he said.
Falling oil exports and fuel shortages, especially of gasoline, have raised the level of popular frustration with the performance of successive Iraqi governments since Saddam's rule.
Iraq's largest oil refinery, in Beiji, was shut down on 18 December because of the deteriorating security situation in the region, Uloum said.
"The capacity of this refinery is seven to eight million litres a day [of petrol] and it is considered one of the vital refineries in Iraq," he said. That's equivalent to about two million gallons of gas a day.
Iraq's security situation has
worsened the fuel crisis
As word of the shutdown spread through the country, several hundred cars waited at one of Baghdad's biggest petrol station.
"After the rise in petrol prices, now we have a petrol shortage," said Ahmed Khalaf, 33.
Ali Moussa, a 51-year-old tanker truck driver, said he and his colleagues were working in a dangerous situation.
"We demand that the government provide security and protection," he said.
"The Beiji storage tanks are full and there isn't any shortage of petrol there. The problem is that drivers are too afraid to go there unless they are protected."
The closure of the Beiji refinery will affect Iraq and Baghdad in particular, which has been feeling the pinch from a shortage of refined fuel, much of which is already imported because of the country's diminished refining capacity.