ENERGY MATTERS: OPEC's Spar(s)e Production Capacity
By DAVID BIRD
A Dow Jones Newswires Column
VIENNA -- Anti-war protesters around the world show their opposition to U.S. moves to drive Saddam Hussein out of Iraq with the slogan: "No Blood For Oil."
For OPEC, in a battle to control runaway oil prices surging on war fears, the motto could be: "No Blood From A Stone."
The stark reality is that the Organization of Petroleum Exporting Countries can't pump much more than it is already doing, even though it is facing the highest crude oil prices since Iraqi troops were laying claim to Kuwait in autumn 1990.
In short, OPEC's spare capacity is really sparse capacity.
OPEC is losing a Sisyphean battle to calm a market overrun by speculators, who have a host of bullish fundamentals backing up their aggressive stance.
Sisyphus, in Greek mythology, was condemned in the afterlife to push a huge rock uphill, only to have it roll down again as he neared the top.
OPEC, trying to set production policy with limited extra near-term resources, finds itself literally stuck between Iraq and a hard place, pumping "more or less flat out" with no time to catch its breath, says OPEC's senior statesman Rilwanu Lukman of Nigeria.
Spare capacity is just 2.0 million to 2.5 million b/d, he estimates, but others, like the International Energy Agency, put it far lower, perhaps just 900,000 b/d. That's a calamitous situation, given that Iraq's current flow of 2.4 million b/d would be in jeopardy in a war and high prices have encouraged refiners to keep the tightest inventories in a generation.
Lukman, who has been around OPEC for nearly two decades, serving many times as the group's president, secretary general and always a key strategist, says the current crisis is among the most taxing he has seen. And that's coming from someone who served key roles during the two biggest price collapses faced by OPEC, in 1986 and 1997.
"We should be clear in our minds, we haven't got unlimited capacity. We don't have it. Nobody has it," he tells Energy Matters.
"If things happen that stretches demand or need for oil beyond what we can do, we can't do anything. Non-OPEC (producers) have reached their maximum. There's nothing anybody can do...In the short-term, you can't increase your capacity, you need time. Even Saudi Arabia will need time to expand," he said, alluding to the Saudis untested claim that production could reach 10.5 million b/d within 90 days.
"So, in the short-term, you lop off two-and-a-half million barrels, then of course, we have a problem," he says, in diplomatic understatement.
Crude prices could hit $50 a barrel - double last year's price at this time - if Iraqi supplies are lost and OPEC can't fill the gap, he warns.
Still, Lukman argues against what looks to be an eventuality for the market and the only thing that can quickly bring down prices - a release of emergency stockpiles held by consumer countries.
The U.S. and its partners in the International Energy Agency hold about 4.0 billion barrels of petroleum reserves which can be released at a maximum rate of near 13 million b/d. The biggest single chunk is the 600 million barrels of crude oil in the U.S. Strategic Petroleum Reserve.
Consumer countries would be "shooting themselves in the foot" if they use their reserves to make "cosmetic" moves to push prices down, because they won't have a buffer against future potential shortages, he says. "When they need it, it won't be there."
So far, the U.S. and IEA say they prefer that OPEC do what it can first to boost supplies, before they would consider uncorking their reserves.
But, with output from kingpin Saudi Arabia not expected to go above current levels near 9.2 million to 9.5 million b/d, OPEC, in pledging to do what it can to guard against shortages, may in fact be doing all it can do - just making the pledge.
What's further roiling the market is a widespread sense that a peaceful end to the current conflict - or a quick war that allows Iraqi oil to flow again in weeks - will send prices screeching lower. Think of Sisyphus' worst nightmare as that downward-bound boulder picks up speed.
But Lukman echoes our sentiments that prices aren't heading into the low $20 or below, because of a strong need to build inventories. That may put the brakes on a quick plunge, and put a floor under the market, after current near-$38 a barrel crude falls by one-third.
"It's a Catch-22," Lukman says, envisioning a cycle of buying inspired by low prices which puts an end to those same low prices. And its a Catch-22 that may catch prices from falling through the $22 end of OPEC's target price band of $22-$28 for its reference price.
Despite obvious similarities to the 1991 Gulf War between the U.S. and Iraq, low stocks and tight spare capacity are the crucial difference for the oil market. Back then, prices plunged when the U.S. and IEA partners opened their emergency stockpiles.
"This is not identical" to 1991, Lukman says. "People should not go to the textbook and rip out what happened and say 'OK, this is what's going to happen' because they will be wrong."
-By David Bird, Dow Jones Newswires; 201-938-4423; david.bird@dowjones.com
(David Bird is senior energy correspondent for Dow Jones Newswires).
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