“Effective” OPEC spare capacity
4 November 2014
Political turmoil in OPEC countries has complicated the task of assessing the level of OPEC spare crude production capacity. So the IEA introduced the concept of “effective” spare capacity to capture the difference between nominal capacity and the fraction of that capacity actually available to markets.
Historically, calculation of OPEC spare production capacity was in part meant to capture the amount of crude output capacity that member countries chose to withhold from markets as a matter of policy, whether to support prices or to comply with production quotas. The idea was that in the event of a supply disruption or a spike in demand, the countries had the option of activating that production to balance markets. Whether or not to activate that production depended on a collective decision by OPEC or a sovereign decision by member countries.
Over the years, however, some OPEC member country governments, for various reasons, have lost control over part of their production capacity. One example is Nigeria, where sabotage forced the closure of onshore portions of the Niger Delta; another is Iran, where international sactions have curtailed access to markets and investment.
Given this new reality, the IEA in 2005 introduced effective spare capacity as an important measurement in its reports on oil markets.
How the new measure is calculated
The IEA calculates effective spare capacity first by determining installed, i.e. implied, capacity: total capacity minus the IEA “call on OPEC” for production, issued each month in the Oil Market Report, and also minus stock changes. It then adjusts notional capacity for a rolling average of the observed difference between implied capacity and recent estimates of actual supplies available to markets. The resulting estimated effective spare capacity, as distinct from the nominal measure, offers a more realistic snapshot of current and future upstream supply flexibility.
In its Medium-Term Oil Market Report 2014, the IEA calculated OPEC implied spare crude oil production capacity at 4.56 million barrels per day (mb/d) in 2013, about 90% of it in Saudi Arabia, rising by 1.23 mb/d on paper through 2016 before plateauing at just above 6 mb/d to 2019. The average over the five years from 2013 to 2019 is estimated at 5.6 mb/d.
In practice, given high disruption risks, only a fraction of this nominal capacity is available to markets. The Medium-Term Oil Market Report 2013 did not estimate effective spare capacity because supply interruptions resulting from Libya’s civil war of 2011 were thought to have been a one-off event. But in view of continued disruption risks there as well as in other OPEC member countries, the IEA this year halved, to four, the number of preceding quarters it reviews to calculate the rolling average used as the adjustment factor to assess effective spare capacity. The change effectively increased estimated “ineffective” spare capacity to 1.5 mb/d, from 1 mb/d earlier.
Based on this method, the IEA estimates OPEC effective spare capacity at 3.52 mb/d this year, ramping up to a peak of 4.60 mb/d in 2017 from 3.06 mb/d in 2013, with the average over the years ending 2019 at 4.06 mb/d.
This article by former IEA Senior Oil Market Analyst Diane Munro, originally appeared in IEA Energy: The Journal of the International Energy Agency. Diane Munro recently left the IEA after five year, which added to her more than two decades of monitoring international oil market developments and geopolitical issues. She previously worked for companies including Wood Mackenzie, BP, Arthur Andersen and John S. Herold.
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