Significant idle oil production capacity now in OPEC countries

The Middle East Economic Survey quotes a former Secretary General of OPEC to the effect that as of December 2010, “there is already 6 mn b/d of idle capacity among OPEC countries”.  This is in the context of a discussion of the projected ramp up of oil production in Iraq that will increase Iraq’s production capacity by roughly 10 million barrels per day.

Massive idle capacity in OPEC countries implies that the bloc is comfortable with oil prices in their current range; as if that were not the case OPEC could increase production quickly to drive prices to a level more to their liking.  China is likely price-insensitive, as the country needs fuel to maintain economic growth rates for social stability.

The story also quotes the official regarding actions taken in the past by OPEC when crude prices became unhinged:

“A very low price scenario would prove unacceptable for the world oil industry. When this type of free-for-all situation arose in 1986, the collapse in oil prices from $25.28/B to $7/B and $8/B was intolerable for the US with its costly domestic production, and a large number of wells were shut down in Texas and other oil-producing states that same year. The then Vice-President George Bush Snr, in the Reagan administration, intervened, requesting that Saudi Arabia reduce its production in order to achieve a minimum price of $18/B (and OPEC agreed to adopt this price at the time). ”

Here are two charts of gasoline prices(source):

Source

The significance of the fact that Saudi production costs were/are a fraction of those in US fields means that part of the reason US production peaked in the time frame predicted by Hubbert was that Saudi fields coming on stream drove down prices below break even points for US production.  It’s possible that Hubbert’s peak had nothing to do with total reserves, but was strictly due to production cost differentials; and that the timing of his prediction was fortuitous or based on knowledge of what was coming from Saudi production.

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