I wrote on Wednesday that the big headlines predicting a massive U.S. oil boom rested in substantial part on an underlying assumption that OPEC countries would restrain production in order to keep crude prices from crashing. It turns out that I was beaten to the punch.
The culprit? OPEC itself. Its annual World Oil Outlook (PDF), published late last week, registers the North American supply boom clearly. (Thanks to Robin Mills for pointing that out to me.) The authors also write that “OPEC crude oil spare capacity is expected to rise to beyond 5 mb/d as early as 2013/2014”. That threshold was exceeded for a couple years following the financial crisis, but otherwise, you need to go back to 2002 to find spare capacity levels this high.
One can also infer projections for spare capacity through 2016 from the OPEC report. OPEC estimated its spare capacity at a smidge less than 4 mb/d during 2011. (This number is slightly misleading for some purposes, since a good part of it couldn’t have been brought online quickly, but it’s the right number for the issue we’re looking at.) OPEC estimates a gain of 1.2 mb/d in its production from 2011-16 but an increase in its liquids capacity of 5 mb/d over the same span. That means an increase in spare capacity of 3.8 mb/d, taking it to a whopping 7.8 mb/d.
You need to go back to April 2002 to find OPEC as restrained as it would need to be to keep 7.8 mb/d of capacity offline. Yet that restraint lasted for precisely one month, and was in part the product of motives other than a desire by OPEC countries to prop up prices. Iraq slashed its oil exports that month, claiming it was in support of the Palestinian cause, with other OPEC members objecting. Venezuela produced 700,000 barrels a day short of its potential due to domestic turmoil. The amount of oil held off the market due to deliberate attempts to stiffen prices, which had weakened following the September 11 attacks, was considerably less than the 7.8 mb/d figure that I estimated above. If you want to look further back, there’s a very brief period in the late 1990s where OPEC holds that much off the market; beyond that, you need to go back to the 1980s to find similar restraint.
The IEA’s estimates of likely OPEC spare capacity, which I discussed in Wednesday’s post, are a bit more modest – perhaps around 6-7 or so mb/d. Even that, though, has limited recent precedent. OPEC held around that level for around a year after the onset of the financial crisis, through a combination of deliberate restraint in several countries and conflict in Nigeria, which took large amounts of oil production offline. Otherwise, you need to go back a decade to find similar behavior.
It should not be surprising, then, that the OPEC report, after forecasting the large gain in production capacity, warns that “investment decisions and plans will obviously be influenced by various factors, such as the global economic situation, policies and the price of oil” (emphasis added). Ultimately, the odds that OPEC will actually hold close to 8 mb/d of spare capacity are small. If the OPEC and IEA reports are right about trends in North America and elsewhere, we’re likely to either see some restraint in OPEC investment, or to find ourselves faced with oil prices that fall considerably, at least for a while, until the market comes back into balance.