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OPEC's Ability to Tame Oil Prices Is Limited

OPEC's ability to tame oil prices that hit a record high above $100 a barrel last week is curbed by limited unused production capacity, officials from the exporter group and analysts say.

The Organization of the Petroleum Exporting Countries says it holds around 3 million barrels per day of production in reserve. Since many members have expressed unease with record prices, that begs the question: why are they not raising output?

Oil Refinery
Oil Refinery

Since oil hit $100 for the first time last week, some OPEC ministers and officials have said most members are already pumping at full tilt, leaving little room for collective action.

"Because most members are currently producing at full capacity, it seems that even if there is a decision to increase the output ceiling, not all members would be able to," Mohammad Ali Khatibi, deputy director of international affairs at the National Iranian Oil Company, said recently.

While OPEC says it could boost output by an additional 3 million bpd -- enough to flood the 86 million bpd world market -- other analysts say that figure is too high.

The U.S. government's Energy Information Administration pegged the group's reserve much lower at 1.6 million bpd in its monthly outlook on Tuesday.

Saudi Arabia, the world's top oil exporter, holds the bulk of the unused production capacity within the 13-member OPEC.

"$100 oil means that anybody that could be pumping should be pumping," said Edward Morse, chief energy economist for investment bank Lehman Brothers.

"That should raise questions about Saudi Arabia's spare capacity. It has heavy oil that it's not producing because there is nowhere to refine it."

Saudi

Apart from Saudi Arabia, the United Arab Emirates and Kuwait are the only other countries able to add significant extra supply, according to estimates from the Paris-based International Energy Agency.

Saudi Arabia says it can pump an additional 2.3 million bpd. But both the IEA, an adviser to industrialised countries, and the EIA put Saudi spare capacity lower at 1.8 and 1.53 million bpd, respectively.

"Right now, Saudi Arabia has around 2.3 million bpd of spare capacity," a Saudi source said. "We could go to 11.3 million bpd and sustain it. That would not be just a surge and would not need any extra effort. Our spare capacity has been tested before on many occasions."

The kingdom was pumping as much as 9.6 million bpd in November 2005, and cut back to around 8.6 million bpd in March last year. Current output stands at around 9 million bpd.

But some experts, including a former senior official at Saudi Aramco, the state oil company, question how long a big boost in supply from mothballed capacity could be maintained.

"The spare capacity they say they have is all there, so bringing it on line is not a problem," said Sadad al-Husseini, a former top official at state oil giant Saudi Aramco. "The question is how long can you sustain it?"

Political Turmoil

In 2004, when oil prices hit then-record highs as Chinese demand surged and stretched producers, OPEC members committed to expanding their production potential.

They have been building capacity up, but due to lower than expected supply from producers outside the group, it has been eaten up by growing global demand, said Paul Horsnell, analyst at Barclays Capital.

Political turmoil in some OPEC nations has crimped the group's reserve production in recent years.

Around 15 percent of Nigeria's installed oil output capacity of around 3 million bpd is shut down because of political violence in the country's volatile Delta region.

Insurgency and insecurity in Iraq, holder of the world's third-largest oil reserves, have prevented the country from revamping its industry and reaching ambitious production targets.

And Venezuela, in the late 1990s an OPEC member that pumped far beyond agreed levels, has lost over 500,000 bpd of output that it never recovered after a strike that crippled the oil industry in 2003.

While some analysts still ascribe a small amount of spare capacity to the country, others doubt that it would hold oil back with the price at $100.

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