OPEC says, ‘Don’t Count on Us’ for More Oil Supply

The results of OPEC’s latest meeting to set oil production quotas were announced this morning. Instead of production targets for individual countries, a group production ceiling of 30 million barrels a day was set. This amount is a bit less than OPEC produced in November 2011 (actual 30.367 mbd), according to its reckoning, and less than it would have produced most of 2011, if Libyan production had stayed on line, based on the amounts shown in its November Oil Market Report.

A recent history of oil production from the November Oil Market Report, both for OPEC and in total, is shown in Figure 1.

Figure 1. Recent oil production for World and for OPEC, according to OPEC November Oil Market Report.

According to a Platts report of the meeting, Venezuelan Oil Minister Rafael Ramirez told reporters, “We are going to reduce the level of production of each country to make space for Libya.” That is not what people want to hear–Brent oil price is still over $100 barrel, even with what seems to be record production for both the world and OPEC, based on Figure 1.

The same Platts report also says, “OPEC on Tuesday said it expected demand for OPEC crude next year to average 30.09 million b/d.” Thus, the new production cap is slightly less than what OPEC sees as demand going forward.

It should be noted that the new limit includes Iraq in addition to the “regular” OPEC countries. Thus, the agreement says that if Iraq increases its production, other OPEC countries will reduce their production to keep total production to 30 million barrels a day. 

All of this comes shortly after Saudi Arabia announced that it has halted plans to increase capacity to 15 million barrels a day by 2020. I wrote about this in a recent post. Saudi Arabia claims to have 12 million barrels a day in capacity now, but there is little evidence that it can actually produce this amount of oil. Saudi Arabia recently boasted that it would increase oil production above 10 million barrels a day, to help offset the drop in Libyan oil production, but amounts reported by the OPEC Oil Market Report and the EIA report of monthly oil production are still under this amount. The highest Saudi oil production reported by the EIA is 9.94 million barrels a day in August 2011.

There would seem to be several reasons for applying an overall cap to OPEC production:

1. OPEC needs/wants high oil prices. They certainly don’t want the price of oil to fall by very much, if they are to have enough funds to pay for all their social programs. So holding production down is in their best interests. An overall cap provides as direct a way as possible of keeping overall production down.

2. It is not clear that most OPEC members have any spare capacity. Saudi Arabia may, in fact, need to “rest” its wells after pushing production to its recent high of 9.94 million barrels a day in oil production. Writing the agreement as an overall cap gives Saudi Arabia “cover” for resting its wells, as needed.

3. This approach is at least theoretically easier to administer. One or two or three countries can make a change in production, if desired, to bring total oil production down to the desired level, if others raise their production.

4. This approach gives a framework for future agreements that can be helpful if Iraq’s oil production should actually increase by very much. Iraq’s production is in effect pulled back in under the agreement.

5. This approach provides great “cover” if one or more OPEC countries experiences a decline in oil production. There is no need for embarrassment if an individual country should experience declining production, since a country can simply blame the result on a need to keep overall production within the selected limit, and thus “save face”. A country with very high stated reserves might be especially embarrassed by an unexplained decline in production, since this might also suggest that the stated reserves were inaccurate.

Why the Market Discounts the New Cap

I am aware that the price of oil dropped after the announcement of the new 30 million barrel a day cap. The view underlying this decline is that the new cap is similar to the individual country caps, and likely to be exceeded if circumstances are right. Furthermore, the 30 million barrel a day cap is similar to what OPEC has recently been producing, so there is no expectation of a cut in production at this time.

It seems to me, though, that OPEC is gradually changing from an association whose primary purpose is to hold down production, to an association of mostly aging oil countries who need to cover up the fact that their oil production may not be able to keep up much longer. The new methodology works much better, if part of the purpose is to cover up the reason for declining production of a few countries.

Figure 2 is a graph I showed in a recent post. It shows Middle Eastern and North African (MENA) oil production as a percentage of world oil production.

Figure 2. Middle East and North Africa oil production as percentage of world total, plus oil price in 2010 dollars. Amounts from BP Statistical Report. Oil includes NGL. Oil price comparable to Brent.

The countries included in MENA are not the same as OPEC, but there is a large overlap with the older OPEC members. Figure 2 shows that this group has not raised production relative to world production by very much, even when oil prices were high, suggesting that they have little capacity to do so.

As the very old wells in MENA countries age further, declining production can be expected to be an increasing problem, adding to the need for countries to “save face” as production declines, as mentioned in Point 5 above.

Conclusion

It will take a while to see how the new cap works out in practice. The important effect may not be in the next three months, but over the longer term, especially if Iraq’s production increases.

Both EIA and IEA are expecting that OPEC will provide the majority of future increases in world oil production. If my interpretation is right, OPEC is suggesting that they will decide how much, if any, increase in production will be allowed through to the rest of the world–that is, assuming that the increase in OPEC production is really there in the first place, and not offset by other OPEC declines.

My expectation is that oil price will really depend on how well the world economy is doing. The world economy is threatening to slip into recession now. If it does, prices may go down. If it does not, and OPEC indeed keeps its production capped at 30 million barrels a day, we should expect higher oil prices ahead.

In any new agreement, the real question is how the agreement is administered in practice. I have suggested one way the new agreement may be used. It will be interesting to see what actually happens.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
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26 Responses to OPEC says, ‘Don’t Count on Us’ for More Oil Supply

  1. Ikonoclast says:

    In Australia we continue to rely heavily on coal for stationary energy (electricity) and for export earnings. At the same time as our national government introduces a carbon tax at a token rate of $23 per tonne, my state government in Queensland continues to push for more coal exports and exapanding production of natural (sic) coal seam gas. Coal production dropped recently but only because of floods.

    “Total production of raw black coal in Australia in financial year 2010-11 was 405 million tonnes (Mt.), down from 471 Mt. in 2009-10. This drop was largely as a result of the Queensland floods of January 2011 where production in that State fell by some 30%”- Australian Coal Association.

    Combined with Gail’s comprehensive analysis of Middle East oil, snippets of news like mine illustrate a basic and (unfortunately) dependable phenomenon at work. The world system will continue to produce and burn as much carbon based fuel as it can. Political protestations about reducing carbon fuel use are at best ineffectual and at worst mendacious. The only limits on carbon fuel use are the real physical limits on availability and the secondary financial constraints on utilisation.

    So, our only hope for a better future (paradoxically after a long, painful and perhaps even cataclysmic period of adjustment of a century os so where several billions will die) is for fossil fuels to substantially run out (as they will) and for mankind to be forced to use renewables.

    A footnote is perhaps needed on the use of the word “natural” in modern advertising and PR spin. “Natural” is used to evoke connotations of goodness. Apparently, if a thing is “natural” it is supposed to be good and efficacious for human life. This is absurd of course. Many natural things are very harmful to humans. Poisonous berries are natural, the Mt. St. Helens eruption was natural, taipan snake venom is natural etc. etc. The only valid use of “natural”, philosophically speaking, is to contrast it to “artifical” i.e. “made by artifice” meaning “made by man”. Artificial (man made) things can also be harmful or efficacious as the case may be.

    • I expect that fossil fuel extraction cannot continue at anything like its current scale for very long, because that production depends on our current complex system–everything from financing, to oversize machinery, to cars for workers to get to work, to the machines to process the coal, natural gas or oil. There may be a few places left in the world where it is possible to mine coal by scraping a little dirt off the surface, and using a pick ax, but these places are generally far from transportation. These places of production can continue, for the benefit of those living near-by, but I expect that most mines and oil or gas wells will not be able to continue without our current system.

      If I am right, the transition away from fossil fuels will be harder, but the fuels themselves will do less damage. The world will eventually (perhaps over a very long time) recover from whatever damage we do to it. It is less clear whether the species living on the world today will recover.

      • phil harris says:

        Gail
        That has to be the most succinct presentation that I have read indicative of the broad context of late-stage industrisaIization (not that details will still need observation and explanation, and notwithstanding the value of your other writing).
        phil

  2. Bill says:

    “So, our only hope for a better future (paradoxically after a long, painful and perhaps even cataclysmic period of adjustment of a century or so where several billions will die) is for fossil fuels to substantially run out (as they will) and for mankind to be forced to use renewables.”

    Well. There it is, then. Good luck with that, kids. [shaking head]

  3. Jan Steinman says:

    Sounds almost like OPEC is implementing Campbell’s Rimini Protocol… :-)

    • It sounds sort of close, doesn’t it. Under Campbell’s Rimini Protocol, producing countries would not produce in excess of their present national depletion rate. The cost of adding new production is getting to be so high, countries don’t want to add much production at all–just let fields decline, unless a little infill drilling will allow production to stay on a plateau.

  4. With various constraints on production, the price of oil continues to decline, The reason for this is the credit needed to push the bid then meet it is being stripped out of the world’s economies.

    It doesn’t matter what the need is, if the cost of production cannot be met the resource will remain in the ground. Meanwhile, the amount of credit that can be made available depends on the amount of low-cost fuel that can be made available.. Low-cost fuel allows businesses to be ‘creditworthy’;.Without credit, the businesses fail and demand declines.

    What the oil producers are seeing is the annihilation of their customers. Industrial economies require energy inputs at rock-bottom prices, they cannot tolerate anything else.The outcome is declining crude prices hunting a market that continually recedes further into bankruptcy with energy resources being shut in.

    • Your point about credit is a very good one.That is what caused the slide in prices in 2008, and no doubt it involved with the current slide in prices. I agree to that low cost oil is what allows businesses to be creditworthy, and allows individuals to buy what they need, and still have funds left to repay their loans.

      One of the classes of customers that is being annihilated is young people. If they can only get a part-time minimum wage job after college, they can’t afford a car or a house or to get married.

  5. Kenneth says:

    This effectly blunts the anticipated production increase the IEA was hoping from Iraq. Has not the IEA been begging OPEC for more investment in production? I am intrigued by the political cover theory of the cartell wide production ceiling for declining resources. Very interesting!

    This is especially interesting to dwell on since I have been questioning my commitment to Peak Oil in the face of a barage of news articles touting our coming supply boom of oil from technological advancements and discoveries.

    • I think it is very easy for newspaper stories to “count chickens before they are hatched”. We forget that even if there is a little good news here and there, it has to be balanced against all of the declines elsewhere. We need a new “Saudi Arabia” every five years (or something like that), and it is doubtful that the new pieces would fit the bill. Even if the stories sound great, they really aren’t all that great.

      Furthermore, we are hitting financial problems resulting from high oil prices right now, especially in the governmental sector. We don’t have the time to wait ten or twenty years until all of these great plans come to fruition. We need enough oil now, to actually bring the price down, and this does not seem like a real possibility.

      • Joe Clarkson says:

        “We need enough oil now, to actually bring the price down, and this does not seem like a real possibility”

        The worst thing that could happen would be for the price of oil to go down, unless the reduction is due to worldwide recession. We need to leave as much carbon of all types in the ground to avoid climate disaster. Since the only proven method for reducing carbon emissions is as a “side effect” of recession, we should hope for as much recession as possible. Bad for humans, but good for the planet.

        • Our problem is that we don’t have good options. I think we are really reaching “Limits to Growth”. If one thing isn’t a problem, another is. The simple idea that we can stop fossil fuel use and live doesn’t work well because (1) our economy cannot stand the slowdown (2) ultimately many things are likely to crash, like the electricity, and food supply, if we attempt to slow down fossil fuels. Actually, I think a crash is likely regardless. I don’t think we have a lot of power to change it, except possibly to move the timing of the crash a bit earlier, which is what I think cutting back on fossil fuels would do.

          • Joe Clarkson says:

            Exactly! But the sooner it happens, the fewer people die of starvation or war. I know it sounds cold to hope for rapid economic collapse, but the more quickly carbon emissions decline, the better for the planet and those people who do survive the crash. Also, if we move into the inevitable decline sooner rather than later, we have a better chance of a “rounded off” peak and a more gradual decline.

            • I suppose this view depends on how many survivors of the crash you expect. If you knew that neither you nor any of your family or friends would be survivors, would your view be the same?

            • Joe Clarkson says:

              This is a reply to Gail below (since the reply option has lapsed from her reply to my comment above):

              With total economic collapse, I think it is likely that 80-90 percent of those whose current life expectancy is forty years or more will die of famine prior to the expected year. This includes my children, but not me or my wife (life expectancy about 17-20 more years), though if the collapse comes as soon as I hope, my wife and I will be at risk too. If business as usual continues until most fossil fuels are consumed, the risk of death will approach 100% for all, regardless of age.

              My family has a small chance of of beating the lower risk, but only due to where we live (rural Hawaii) and the preparations we are taking (very extensive). The biggest uncertainty is whether our children who are now on the mainland will be able to join us as collapse ensues. If not, there will be other young people in our area who will be welcome to join our ohana.

              To directly answer your question below: Yes; I would rather my family die than be party to total human extinction. Considering that horrible fate, are there really those who would rather live?

            • It is in a way good that we really don’t know how things will turn out. My guess is that lack of clean water will be a major issue; diseases spread by polluted water and by lack of sanitation will be another issue. I don’t see famine as necessarily the #1 issue.

            • Kenneth says:

              Carbon emissions are not a problem. Wishing for global collapse to happen sooner is.

              Temperatures have risen less than a degree with no noticeable effect and there is no definitive proof that CO2 is the culprit. Living without fossil fuel consumption is much more detrimental than you think.

              6.8 Billion people live on the earth and fossil fuels are the only reason that this many people are able to survive. Mass production modern agriculture is completely dpendent on fossil fuels and starvation awaits 6.8 billion people without fossil fuel.
              Idealizing some feudal existence in a carbon free world is insanity.

              If you think you can isolate yourself and grow crops while the world starves, think again.
              There is a saying that society is only three meals away from anarchy. You will have to kill your neighbor or some other starving individual because they are unable to feed themselves or their family and you may not be able to feed yourself without the conviences running water, pestcides, fertilizer. Look back at history. It is filled with crop blight, insect plagues, drought, crop failure.

              Wishing for global collpse sooner is nuts.

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  7. DownToTheLastCookie says:

    We need to stop living in the past. The future is here now ($4 a gallon), make the best of it and embrace it! We are not at the end of the industrial world; we are at a new better beginning. Where is that American capitalism (trickle down) economic spirit? Gone? Just a lie? Show OPEC who is in charge. We can live very happily ever after with less oil. Say, “Mission accomplished” & “Bring it on” to the end of oil. It will be a better America and world. Let us not forget we voted for change, so let’s change.

    Seriously, “We have nothing to fear but fear it’s self” and $12 a gallon gas lines if we don’t change. 55 MPH is the first step to (Merry Christmas and) Peace on Earth (less war). If you can’t produce more energy, you have to make what you have more efficient. It’s really that simple.

    This is going to be the future – Embrace it!

    http://media.mitsubishicars.com/index.php?s=21422&item=3#Photos:11090

    • Mark Johnson says:

      What an optimist!! You might also want to have a glass of reality too. One half full.

      • DownToTheLastCookie says:

        As humans we actually have this thing on top of our shoulders which most other animals don’t have that let’s us plan our future. Or, we can pretend BAU and count the barrels, then recount the barrels and again count the barrels until one day there are no more barrels. That’s how my dog manages her life. I fill her bowl BAU everyday. But the day I stop filling the bowl, her days are numbered.

        The world is still producing three and four hundred horsepower fossil fuel passenger vehicles that can cruse one person at over 100 mph effortlessly, even when our basic speed limit is 65 to 70. What a waste of engineering and resources. I see the world and even more so America as having a wasteful transportation problem more than an accounting energy problem. As long as humans want to race every half a mile from 0 to 50 to 0 and cruse at 70 & 80 we are not serious about our natural resources limitations or environment . It’s just more BAU until one accepts “change”.

        We humans have a choice. We can plan for our future and make the resources we have last for hundreds of more years. Or it’s BAU and one day soon nature is going to take away the bowl. I’m really not that optimist !! Most humans ( especially Americans ) only care about themselves. At some point in the near future most of us are going to look back and say “it didn’t have to be this way”. But by then it will be to late for future generations.

        Change can be good. Embrace it !

  8. Hello Gailtheactuary,
    On a similar note,, ATHENS – GREECE, — An individual person called Basil Dimitropoulos, who is a graduate Electrical Engineer with specialization in Magnetic Recording Applications, has long announced that he developed a project that concerns Electric Power Production From Magnetic Tapes. This electromotive system affects directly the Global Home Appliances Industry and Transportation Industry, resulting in portable and mobile power supplies for Household Devices and Electric Vehicles. It is an Entirely Environment-Friendly energy source of very low cost.
    Keep up the posts!

    • I am not convinced that even if someone came up with a cheap new electric power source tomorrow, that it would save the day. We have an awfully lot of transportation vehicles that run on oil today. We don’t have electric replacements for these vehicles. Even if we did, it would take too long to implement, and be too expensive.

      • DownToTheLastCookie says:

        Hello Gail,

        I believe you are not convinced because you view the world BAU. The days of 70 plus MPH highway speeds are numbered. They just consume too much energy and are unsustainable. That’s the last thing oil companies want the public to embrace at this time. If you consider the reduction of highway speeds as society collapse, then you are right on the money and should be proud.

        The Nissan Leaf optimal energy efficiency speed is 38 mph. If the world stopped building oil fueled passenger vehicles tomorrow and mandated 40 mph max vehicles. There would be no oil crisis and your blog would have little to write about. Now that’s “change” the world could live with.

        You see at 40 mph (maybe even 45 or 50 mph) the world can live happily ever after without mass amounts of oil, but oil companies and your blog can’t.

        Change can be good. Embrace it!

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