Environmental Engineering Reference
In-Depth Information
The spare capacity weapon
OPEC's ability to influence the oil price depends essentially on its will-
ingness to hold production capacity in reserve when prices and demand
are weak, as well as to use it when prices and demand pick up. Keeping
capacity idle is not a normal thing for anyone to do. Even when demand
for oil slumps, non-OPEC oil producers do not reduce output. This makes
it doubly hard for OPEC. When the cartel reduces output to maintain
prices, it has to watch non-OPEC producers take its market share and,
free-riding on the cartel's self-restraint, reap the benefit of higher prices.
This is why OPEC members so often cheat and pump more than their
alloted quotas. But it is spare capacity, and the willingness to increase
that spare capacity if necessary, that gives OPEC some influence over the
market. In practice, this influence comes almost entirely from OPEC's
dominant member, Saudi Arabia. By raising total capacity to 12.5m bar-
rels per day (mb/d), Saudi Arabia's spare capacity exceeds the production
of the next biggest producer, Iran (see table below).
OPEC country production, November 2009
OPEC member
Output (in millions of barrels per day)
Algeria
1.25
Angola
1.89
Ecuador
0.49
Iran
3.73
Kuwait
2.27
Libya
1.52
Nigeria
1.99
Qatar
0.8
Saudi Arabia
8.25
United Arab Emirates
2.10
Venezuela
2.2
Iraq
2.43
Source: Centre for Global Energy Studies
OPEC claims to want to keep oil prices just like Goldilocks' porridge -
not too hot and not too cold. In practice, however, OPEC likes its oil price
pretty high. The oil producers would not be human if they did not take a
