How Elastic is Saudi Oil?

Spot oil price versus Saudi Arabian oil supply, 2001-2009.  Source: Supply is an index constructed from EIA, IEA, JODI, and O&GJ estimates. Price is spot price of West Texas Intermediate according to EIA , adjusted for inflation using the CPI to Jan 2008 dollars.

Having discussed Russian oil the other day, here is the Saudi picture, which is much more complex.  Firstly, in the 2001-2004 timeframe, Saudi Aramco clearly had spare capacity, and was able to produce more for fairly modest price increases (green portion of the curve).  However, in late 2004 and 2005, they stopped increasing production at about 9.5mbd (in this average - the data sources don't completely agree on the level).  Production even declined in 2006 in the middle of the big price rise, provoking great debate in energy circles about whether this was a voluntary or involuntary decline.  Then it increased again, but not to more than 9.5mbd.  In late 2008, production was reduced sharply in a manner that I assume few would dispute was an intentional cutback to support prices in the face of a global recession.

Now the question is what price is required to get them to turn on the 1-1.5mbd of spare capacity that previously they were willing to sell at these prices, and whether any price can get them to go above 9.5mbd (they claim to have capacity of about 12mbd, but we've never seen it, and actions speak louder than words).

The difference between current production and maximum previously demonstrated production is enough to satisfy the increasing demand from the various growth sectors discussed yesterday for 12-18 months.