OPEC spare productive capacity 'diminished'

Increasing global demand for oil and natural production declines have diminished OPEC's excess productive capacity and its power to manipulate oil prices, said Raymond James analysts.

Sam Fletcher
Senior Writer

Increasing global demand for crude and natural production declines have diminished the excess productive capacity of the Organization of Petroleum Exporting countries and its power to manipulate oil prices, said analysts J. Marshall Adkins and Collin Gerry in the Houston office of Raymond James & Associates Inc.

Saudi Arabia, OPEC's biggest oil producer, plans to raise its production capacity to 12.5 million b/d by 2012 from 10.5 million b/d currently. "For the record, we don't think the magnitude of this increase is attainable," said Adkins and Gerry in a July 9 report. "The more relevant issue is that declining productivity and political instability of other OPEC member nations are likely to mute any success that Saudi Arabia has with increasing OPEC's productive capacity," they said.

Potential OPEC production increases are offset by five member countries that are facing either permanent production declines or structural constraints, they said. "Over the past 40 years, OPEC has historically had a cushion of anywhere between 4-16 million b/d, excluding certain geopolitical events (which occurred mainly in the 1970s)," Raymond James reported. That gave the cartel its control of oil markets. "Today, OPEC's excess capacity has all but disappeared," the analysts said.

In October 2006, when domestic and international oil inventories were at relatively high levels and increasing, OPEC announced a two-part production cut that would take some 1.7 million b/d of crude off the market. In aggregate, the cartel successfully implemented more than half of the proposed cuts, between 1-1.2 million b/d with roughly half of that attributed to Saudi Arabia. "However, this may be somewhat misleading. Looking at the production trends over the past year, it appears that at least a third of the decline in OPEC production has been involuntary in nature," said Adkins and Gerry.

OPEC production now is 1.9 million b/d below its peak in October 2005. "It appears that nearly half of this decline is attributable to involuntary cuts" by Indonesia, Iran, Nigeria, and Venezuela, said the Raymond James analysts. The aggregate production of these four countries, "which constitutes 30% of total OPEC production, was declining well before the cartel initiated its official cuts," analysts said.

National breakdowns
Oil prices surged to 10-month highs July 6 as militants in Nigeria ended a month-long truce with an attack on a well site and the kidnapping of a 3-year-old British girl. The child was grabbed by gunmen July 5 as she was being dropped off at school in Port Harcourt by her father, an employee in the petroleum industry. She was released apparently unharmed July 8, but three foreign workers were abducted. More than 200 foreigners, mostly oil workers or members of their families, have been kidnapped in Nigeria since January 2006. Nearly all were subsequently released or freed by government soldiers.

"Because of these internal problems, Nigeria has been forced to shut-in as much as 800,000–1 million b/d of production, and it now produces about 2 million b/d. We don't expect peace to break out in this country anytime soon. In fact, the recent escalation of kidnappings (particularly from offshore operations) is likely to drive more operators and service companies away from the region," said Adkins and Gerry.

Venezuela's access to foreign capital and technology has diminishing rapidly in the last few years because of President Hugo Chavez's drive to again nationalize the country's petroleum resources. "Since early 2005, Venezuela's production has gradually and consistently declined from the 2.8 million b/d range to closer to 2.3 million b/d, which is a decline of 15% in just over 2 years. Without outside investment or know-how, that decline is likely to get worse before it gets better," the analysts said.

The political climate in Iraq and Iran is not conducive for foreign investment. Politics and sabotage have prevented Iraq from obtaining its pre-war production levels. US companies are prohibited from doing business in Iran, and many Europeans are afraid to make major investments. "Iran's production has been stagnating near the 3.9 million b/d level for 2 ½ years now. Without access to foreign capital, and more importantly, foreign technology and infrastructure, the prospect of increasing production meaningfully higher remains unlikely," analysts said.

"Indonesia's production stagnated for most of the 1990s until it began a permanent decline in 2000 from the 1.7 million b/d level to the current level of approximately 800,000 b/d. In fact, Indonesia is struggling to maintain its status as a net exporter of oil, as it now imports almost as much or more than it produces," Adkins and Gerry said.

(Online July 9, 2007; author's e-mail: samf@ogjonline.com)

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