Tuesday, August 03, 2004

$44/barrel and still rising -- and OPEC is starting to get worried.
�The oil price is very high, it�s crazy. There is no additional supply,� [OPEC President Purnomo] Yusgiantoro said �Saudi Arabia can increase production, but cannot do it immediately.�

Although he has made comments about the lack of spare capacity before, it was the first time Mr Yusgiantoro had appeared so concerned about Opec�s inability to keep the market better supplied.

�It is undeniable that Opec spare capacity looks worryingly low by historical standards,� said Kevin Norrish at Barclays Capital.

�Saudi Arabia has confirmed that it can take production up to 10.5m barrels a day �immediately� though in the current environment the damage is probably already done and it is unlikely that the Saudi response will result in oil prices falling back by much in the short-term,� Mr Norrish added.
Officially, Saudi Arabia is producing at 90% of capacity, and the Saudis are the only ones in the world that have any spare capacity left. The emirates, Mexico, you name it, have boosted to 100%. The Algerian oil minister was bold enough to say that "OPEC can do nothing" about the price rise.

If Saudi Arabia goes to full production capacity, not only can OPEC "do nothing". It very well may "be nothing", too. OPEC quotas are meaningless in the global oil economy of 2004, and without quotas, what is OPEC's raison d'�tre? This is precisely what the Saudis feared back in June and why they didn't agree to open the taps all the way back then. Saudi Arabia isn't only worried about keeping the global economy humming on affordable oil. It's also worried about putting Humpty Dumpty back together again once supply exceeds demand.

Of course, that might not be for a while. In its July report, the IEA estimated 2004:IV demand at 82.9 million bpd, and 2005:I demand at 83.5 million bpd. There is currently not enough capacity on the planet to meet these levels of demand, and no way that another 3 million bpd will come into production over the next six months.

I leave you with three words: Strategic Petroleum Reserve.

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