Learn more about Hart Energy Conferences
Get our latest conference schedules, updates and insights straight to your inbox.
For more than a decade OPEC has stated that an element of its policy is to stabilize volatility in global crude prices through buffer capacity in the case of disruptions. Authors Axel Pierru, James Smith (SMU), and Tamim Zamrik recently published a study for The King Abdullah Petroleum Studies and Research Center (KAPSARC), based in Riyadh, Saudi Arabia, analyzing the size and impact of this capacity on oil prices.
The authors looked at how effective OPEC has been in estimating the size of oil market shocks, as well as “execution errors and constraints when implementing production decisions.” Focusing on data from September 2001 to October 2014, they found that “OPEC has the ability (at least in theory) to stabilize the price of oil,” and that Saudi Arabia on its own, or the OPEC subgroup of its Four GCC members, have the same ability. A look at data from periods when OPEC has drawn upon its spare capacity reaches the same conclusion, according to the study, published in The Energy Journal.
“Under plausible assumptions regarding the elasticity of demand, OPEC’s stabilizing influence appears to have been very substantial, perhaps reducing oil price volatility by as much as half,” according to the authors. Overall, the study found that “the estimated size of OPEC’s buffer has been in line with global macroeconomic needs.”
The authors addressed the fact that the study is based on date only up to October 2014. “We do not overlook the strategic change within OPEC in late 2014 to rebalance the market, but that episode followed the end of our sample period. In any event, OPEC appears to have resumed its role in helping to stabilize the market, albeit at a lower price.”
Adam Sieminski, KAPSARC president, in mid-July issued a commentary on the results, noting that rising oil prices and heightened geopolitical uncertainty had “put OPEC’s spare production capacity back into the spotlight,” and that the KAPSARC study found that this capacity “generates between $170 billion and $200 billion of annual economic benefits for the global economy.”
According to IEA data, Saudi Arabia has held an average of 70% of OPEC’s total spare capacity since 2001, Sieminski noted. “The analysis confirms that OPEC’s buffer, estimated at 2.64 MMbbl/d (1.94 MMbbl/d for Saudi Arabia) has been in line with global macroeconomic needs.”
Sieminski addressed the impact that U.S. shale oil has had on the market now that it stands as the world’s marginal producer, noting that it has made non-OPEC supply much more reactive to price. “By contributing to market stability, shale oil is capturing a share of the historical value of spare capacity for the world economy and reducing the incentive for OPEC members to invest in maintaining the cushion.”
But, he said, shale oil can be hamstrung by logistical factors, such as the current constraints in the Permian Basin, and it can’t rapidly offset unanticipated shocks of large magnitude. “As such it does not provide sufficient protection for the world economy, and OPEC spare capacity still provides value in stabilizing oil markets,” he concluded.
Recommended Reading
EQT CEO: Biden's LNG Pause Mirrors Midstream ‘Playbook’ of Delay, Doubt
2024-02-06 - At a Congressional hearing, EQT CEO Toby Rice blasted the Biden administration and said the same tactics used to stifle pipeline construction—by introducing delays and uncertainty—appear to be behind President Joe Biden’s pause on LNG terminal permitting.
Oscars Season? Meet Guidance Season … and the Winner is?
2024-01-18 - Like movies under the Marvel and “Star Wars” banners—that have recently bombed—growth stocks are continuing a good run, but the appeal of the niche midstream sector could take center stage in 2024.
Venture Global Acquires Nine LNG-powered Vessels
2024-03-18 - Venture Global plans to deliver the vessels, which are currently under construction in South Korea, starting later this year.
Apollo Buys Out New Fortress Energy’s 20% Stake in LNG Firm Energos
2024-02-15 - New Fortress Energy will sell its 20% stake in Energos Infrastructure, created by the company and Apollo, but maintain charters with LNG vessels.
Subal: Pockets of Growth Balance Fears of Slowdown
2024-01-11 - U.S. midstream and energy infrastructure has a mixed outlook for 2024, with a possible loss in demand and stronger focus on renewables offset by solid oil prices and a healthy midstream industry with pockets of growth.