Addison Wiggin asks the question, where is the spare capacity going to come from? Peak oil is a very real thing and it is a reality we will live with for the rest of our lives. The era of cheap energy is over until we make the next quantum leap into a future energy source.
An interesting concept is the flow of gold as it relates to the flow of oil. FOFOA wrote an awesome article on this topic and shows how Saudi Arabia is the swing producer and dictates what price oil is sold at within OPEC. They take a lower price for their oil because only a portion of the value of their oil is denominated in dollars, the rest in gold. They came to a clandestine agreement with the US to set up a flow of gold to provide the lion”s share of payment, with the balance in dollars. They believe, rightfully so I might add, that dollars are doomed and will eventually be worthless. Gold on the other hand is real money that will withstand the age. As their oil is depleted, they will be left with nothing to sustain their kingdom other than what they have set aside from their oil payments. It is very possible that much of our world’s private stock of gold has flowed to Saudi Arabia in exchange for oil. Read it here: It’s the Flow, Stupid
The chairs and nameplates are being lined up, the caviar is being prepped, the world’s finest hookers and blow are standing by. Tomorrow, OPEC gathers for one of their occasional price-fix…er, production quota meetings in Vienna, Austria. As always, the party will ensue.
But for a bunch of people who supposedly hold the world economy by the short and curlies…we can’t help but notice the ministers are looking decidedly feeble these days. As a consequence, the bickering – in Arabic, Farsi, Spanish, Portuguese and English – is liable to be more heated than usual this time around.
For starters, some of OPEC’s member nations are supporting a military campaign against another member nation. Kuwait, Qatar and the United Arab Emirates back the rebels trying to dislodge Libya’s Col. Gaddafi from power.
True, OPEC has been through this before… with Saddam Hussein 20 years ago. But it’s a lot harder for 12 guys in a room to reach a decision when three of them have bosses who are scheming to overthrow or even kill the boss of another. Just sayin’…
OPEC’s two key movers, Saudi Arabia and Iran, are also bitter enemies. That said, they appear to be in agreement this time on one essential issue: They think it’s time to bring more oil onto the market by boosting OPEC’s production quotas.
They’ve sat unchanged since they were lowered in December 2008 – when oil prices had crashed to $32 a barrel and it looked as if nuclear winter was descending over the world economy.
“OPEC is trying to compensate part of the shortage of supply of crude and create a balance in the market,” Iran’s OPEC governor Mohammad Ali Khatibi said recently. Usually, the Iranians are in the lead pushing for higher prices.
It’s one thing for OPEC ministers to say they want to boost production. It’s another to actually pull it off. This brings us back to an issue we’ve examined before – “spare capacity.”
Spare capacity is the ability of oil producers to jump-start new production within one month and keep it going for three months. Right now, there’s not much of it…
- Libya’s 1.3 million barrels a day of production are out of the picture for the duration of the war there
- Production in Venezuela, under the stunning mismanagement of our favorite caudillo Hugo Chavez, has been falling for years
- Oil installations in Iraq have come under attack in recent months
- Kuwait and the United Arab Emirates are already pumping full-tilt.
- That puts the spare capacity burden, as usual, on Saudi Arabia.
Officially, Saudi “spare capacity” is estimated at 2.5-3 million barrels a day. In a world that burns 89.2 million barrels per day, that’s not much. When you consider most of that spare capacity is heavy crude – the viscous variety that’s a challenge for many refineries to handle, it seems like even less.
Those numbers get all the more alarming in light of a Morgan Stanley estimate of worldwide spare capacity that we shared on March 4.
Trouble is, if spare capacity is all up to the Saudis now, and the most they can do is 3 million barrels a day, the chart is already out of date. Spare capacity could be gone even before Morgan Stanley’s estimate of 2013. Even if the bank’s estimates are right, the world is going to need some energy assistance very soon.
How Will OPEC Boost Oil Production? originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.