Saudi Arabia’s government on Tuesday ordered state oil company Saudi Aramco to halt its oil expansion plan and to target a maximum sustained production capacity of 12 million barrels per day, 1 million bpd below a target announced in 2020.
Saudi Arabia and fellow members of the Organization of the Petroleum Exporting Countries (OPEC) the United Arab Emirates, Iraq, and Kuwait between them hold almost all the world’s spare oil production capacity – idle output that can be brought online in times of war or natural disasters.
HOW MUCH IS THERE?
Saudi Arabia currently holds a spare capacity of 3 million barrels per day, a source with direct knowledge of the matter said, equal to about 2.9% of daily world demand according to Reuters calculations.
The International Energy Agency estimates that OPEC’s total spare capacity is 5.1 million bpd, of which 3.2 million bpd is held by Saudi Arabia, 1 million bpd by the UAE, 400,000 bpd by Iraq and 300,000 bpd by Kuwait.
Another OPEC member, Iran, is producing below capacity but due to U.S. sanctions is not able to respond quickly to boost supplies.
Spare capacity is held by the largest producers in OPEC as well as some of their allies as a consequence of their decision to cut supply to the world market due to rising output from non-allied producers such as the U.S., Brazil and Guyana.
OPEC+, which includes OPEC, Russia and their allies, has deepened cuts in the past few years, reducing production by almost 6 million bpd in a series of steps since 2022 to support the market.
A new OPEC+ cut of 2.2 million bpd, of which Saudi Arabia is contributing 1 million bpd, is in place for the first quarter of 2024.
OUTSIDE OPEC
Outside OPEC, spare capacity is limited. The IEA estimates Russia has sustainable capacity of 10 million bpd, about 500,000 bpd more than it produced in December.
Azerbaijan and Kazakhstan, also members of OPEC+, each have 100.000 bpd of idle output capacity, according to the IEA.
OIL’S CENTRAL BANKER
As the world’s largest holder of spare capacity, Saudi Arabia derives international influence from a role often described as the oil market’s equivalent of a central banker.
The kingdom is uniquely able to add supplies to oil markets in times of need. It has shown there is a limit to how much it is prepared to cut to support the market when other producers are pumping more.
It tapped spare capacity to pump more in a brief price war time Russia for market share in 2020.
Building and maintaining surplus capacity costs billions, and some analysts said the Saudi move on Tuesday could give the kingdom more for other Saudi government projects.
IMPACT ON PRICES
The level of spare capacity – or the perception of how much is available – can influence world oil prices.
Ample spare capacity has been cited as a dampening factor on prices by some analysts.
HSBC said in a report last week that OPEC’s “above-average” spare capacity will offset the impact of Red Sea disruptions and rising geopolitical risks, with Brent crude oil likely staying between $75 and $85 a barrel in the medium term.
Skepticism over how much spare capacity there is usually grows at times of high oil prices and strained global production, such as in 2022 when Russia invaded Ukraine. The kingdom has regularly proved its doubters wrong in the past.
