LONDON (ResourceInvestor.com) -- In response to the surging oil price, the Organization of Petroleum Exporting Countries, the global cartel of Third World oil producing nations commonly known as OPEC, has stated that it is ready to make available to the market if requested all of its so-called spare production capacity. The key question is; can this offer give any appreciable relief to those businesses and private consumers under pressure from today’s oil prices?
OPEC’s promise has been dismissed in many quarters as irrelevant, based upon a well-founded belief that much of the margin that the cartel is referring to, a margin that could be up to 2 million bpd but is probably somewhat less, is in the form of heavy, sour grades of oil.
The problem with this is that these grades are unsuitable, given the technological state of the majority of current refining capacity, for producing the transportation fuels and other fractions for which the world economy is crying out and for supply of which it largely depends on oil.
What is primarily required by refineries to produce products such as these is light, sweet crude, and there is a strong possibility that extra output of this is simply unavailable, driving headline oil prices, which refer to light, sweet grades, higher in price of late.
Indeed, a chorus of opinion currently cites a lack of appropriate refining capacity for the heavier grades of oil which are more abundantly available on the world market than light grades, rather than a paucity of oil production in general as responsible for recent marked light crude price rises.
In addition, estimates abound that OPEC is already supplying around 650,000 bpd more than its current formal production ceiling, which could mean that its pledge to make more capacity available is mostly symbolic, with actual output, in particular that of the important light grades, remaining largely unchanged.
A potent criticism of OPEC though that casts doubt over all its actions and assertions is that any change by the cartel to its production profile may be motivated by political more than economic considerations, and that greed could cause it to maintain prices as they are even if it were able to reduce them, whatever the consequences for demand and for the health of the global economy.
According to this view, OPEC is playing a devious game, publicly blaming a shortfall in refining capacity for the high oil and fuel prices that are garnering so much public obloquy, meanwhile being bent on enjoying increased revenues while it can.
World opinion appears to be divided on whether or not OPEC, through unknown machinations, is at least in part responsible for today’s high oil prices. Gordon Brown, the UK’s Chancellor of the Exchequer, appeared to say yes in a well-publicised recent outburst, and European Union Energy Commissioner Andris Piebalgs has also lately hinted at such.
But a different view was propounded in recent comments by International Energy Agency (IEA) Executive Director Claude Mandil, in which he laid the blame for high oil prices more on a lack of suitable refining capacity than on underproduction by OPEC, and in any case cast doubt on the cartel’s ability to provide the extra crude production it claims is available to those who want it.
What will be interesting to note in the near future is the extent to which, and for what reasons, OPEC’s offer of extra crude production is taken up. Given that this crude is most probably of less desirable heavy, sour grades, and that a lack of the right refining capacity seems to be acute, then take up could be modest and price impact very limited.
Ultimately of course, lack of refining capacity is not the whole story. The unalterable dynamic of rising demand, particularly from East and South East Asia, versus declining global light crude reserves, coupled with geopolitical uncertainty, is most probably the prime mover in today’s oil market. This means that OPEC’s so-called spare capacity is very unlikely to be adequate to take the headline light crude price off the boil any time soon.
