Testing oil potential

July 25, 2011
Cessation of oil production in Libya has refocused attention on an important question with no easy answer: How much oil can the world produce?

Cessation of oil production in Libya has refocused attention on an important question with no easy answer: How much oil can the world produce?

Events since loss to the market of 1.5 million b/d of Libyan oil cloud the discussion. Last month the Organization of Petroleum Exporting Countries held an acrimonious ministerial meeting that ended without an increase in production ceilings. Saudi Arabia immediately said it would increase output anyway. Then the International Energy Agency announced a 2 million b/d withdrawal from strategic inventories.

The Saudi question

IEA's action deferred testing of a question heard with increasing frequency since the Libya disruption of last February. It's crucial to the question about global production capacity: How much oil can Saudi Arabia produce?

IEA credits the kingdom with capacity of 12.04 million b/d of crude oil. Against June output of 9.7 million b/d, spare Saudi capacity at the beginning of July thus was 2.34 million b/d, most of OPEC's—and therefore the world's—idle capacity of 3.61 million b/d.

But there are doubters. Analysts who worry that worldwide crude oil production is approaching its geologic limit tend to think Saudi and worldwide capacities are overstated. When Saudi Arabia announced it would increase production to replace lost Libyan oil, some of them predicted it would be unable to do so. Hence the test.

Even without the complexity introduced by IEA's stock surprise, answers to these questions were destined to be ambiguous. Saudi Arabian production is as much a matter of royal will and revenue need as of hydrocarbon endowment, reservoir performance, and well counts. The kingdom keeps 1.5 million b/d of capacity idle to cover surges in demand. Its incremental flows tend to be of crude with quality below that of the missing Libyan oil and therefore harder to sell. Lately, it is reported to be asking more than buyers want to pay for extra supply.

Still, Saudi production has been increasing. Its estimated June level was 1.1 million b/d higher than the February rate. So the kingdom has shown it can produce more oil than it did earlier this year; it hasn't shown it can produce at estimated capacity rates. Questions thus remain not only whether the kingdom can produce 12 million b/d but also whether, under present market and geopolitical circumstances, it would. Definite answers will elude the current test.

The test does, however, throw important light on OPEC capacity in general. In the next few years, developments will relate intriguingly to members other than Saudi Arabia.

In its July Oil Market Report, IEA projects a relatively small increase of 155,000 b/d in total OPEC production capacity between this year and 2012. But the yearly change is deceiving. IEA says the group's total capacity will stay suppressed through early next year before spurting in the second half as Libyan capacity begins to recover. In the third quarter of 2012 total OPEC capacity will reach 34.87 million b/d—above its level before the Libyan loss. In the fourth quarter it will reach 35.1 million b/d.

The year-to-year change in IEA's projection comes despite a 213,000 b/d decline in Saudi Arabia. Capacity also declines in Iran and Nigeria but increases in other OPEC countries, however modestly in most cases. The biggest gains are 265,000 b/d in Libya, 197,000 b/d in Iraq, 127,000 b/d in Angola, and 106,000 b/d in the UAE.

When's the peak?

Fulfillment of these projections, if it happens, shouldn't defray concern about peak oil production, a physical inevitability of indefinite timing and huge economic consequence. It would, however, show that production capacity can grow among the world's most important oil exporters. It also would show that production capacity can grow outside Saudi Arabia.

And what about validity of Saudi capacity estimates? The most useful observation may be that expressions of doubt about the kingdom's ability to produce oil have been wrong in the past—but won't always be so in the future.

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