Friday, December 18, 2009
Having worked out estimates for the rise of oil demand during a recovery, the next step in my overall agenda of estimating the timing of the second shock is to look at the spare capacity situation.
We need to distinguish various kinds of spare capacity. This is particularly true of OPEC countries. My mental model of the rulers of autocratic oil producing countries is that they are a pack of liars. Ahmadinejad did not win the Iranian election in a landslide and the Iranians have been demonstrably lying about their nuclear programs. Saddam Hussein was not a truthful man, and the new Iraqi government is one of the most corrupt in the world. Saudi princes have been skimming off money from the Saudi state since whenever. Middle Eastern oil reserves did not double overnight in the 1980s only to be flat ever since.
Given that these people and regimes are not really trustworthy, taking what they say about their oil reserves and spare capacity at face value is fairly naive in my opinion. Better, to the extent feasible, to look at what they do, rather than what they say. Let us look, then, at the history of OPEC production versus price:
As you can see, current production is about 2mbd below the maximum production demonstrated in recent years. So I'm willing to grant that there is fairly definitely 2mbd of spare capacity at present. Of that, about 1.5mbd is in Saudia Arabia:
and the rest is split between some of the smaller OPEC producers.
Given that global demand is likely to grow somewhere between 700kbd and 1400kbd each year during the recovery, if prices stay something like current values, 2mbd would last us between 18 months and three years. The "if prices..." part is really almost entirely up to Saudi Arabia.
However, there are two significant uncertainties here: 1) have the Saudis really increased their deployable production capacity with recent megaprojects? and 2) what are the prospects for Iraqi production now that contracts with western oil companies are being signed? These I will take up in coming posts.