With the price of US light sweet crude reaching a record $44 a barrel in New York on Tuesday, Purnomo Yusgiantoro, the Indonesian president of the Organisation of Petroleum Exporting Countries admitted there was little OPEC could do.
“At the moment we cannot increase supply,” he said. OPEC is already surpassing its quota of 26 million barrels a day (bpd).
The oil cartel is reluctant to give figures, but agreed last month to boost its surplus production capacity next year by one million bpd to 2.8 million bpd. At present OPEC countries supply around a third of the world’s production at 28.6 million bpd.
OPEC’s surplus production capacity, in particular that of Saudi Arabia, works as a market shock absorber, explained Takin Manouchehr, an analyst at the London-based Centre for Global Energy Studies (CGES).
“The cause of the high prices are, first, demand and then the question is supply to match it,” he said.
“I think supply can match it but without much spare capacity to make people comfortable.
“People are used to having spare capacity as a safety cushion, and that cushion is getting smaller, but there is no shortage.”
Manouchehr said the market had not expected such strong demand from countries like China and India which pushed overall consumption up by 3.2% in one year to 81.4 million bpd, but added the problem should be temporary.
“It’s not a problem on an absolute basis, but on a short term basis: it’s a mismatch of what has been developed, what is ready to what is needed,” Manouchehr said.
“People are used to having spare capacity as a safety cushion, and that cushion is getting smaller, but there is no shortage”
“It may be two months, three months from now, and they want it now.”
He thought OPEC would increase production capacity, and according to Yusgiantoro, Saudi Arabia has already agreed to do so, but will need time.
Manouchehr said “some months” would be necessary to bring new installations in the east of Saudi Arabia, capable of delivering 650,000 bpd, on stream.
Nicolas Sarkis, publisher of Arab Oil and Gas magazine, was more reserved, and said over the last 30 years Saudi Arabia had often published production capacity targets that were later revised downwards.
An initial target of 20 million bpd was reduced to 15 million, then 13 million, whereas present capacity and production were put respectively at 10.5 million and 9.5 million.
“Things are not at all clear,” Sarkis said. “There is no control, no audit of that.” He thought “the oil is there” but that getting it to the market required a political decision and substantial investment.
According to Manouchehr, OPEC could drag its feet “if it isn’t 100% sure the oil is needed.” An oversupply could lead to a 1998-style collapse in prices, an event OPEC members have not forgotten.
But an increase of a million bpd to provide a “cushion” remains a possibility, he said. Besides Saudi Arabia, Algeria, Libya and even Nigeria, in spite of its recurrent labour problems, could help.
Iran, the United Arab Emirates and Qatar could also contribute.