Why The Saudis Hold the Cards Right Now

By Jim Williams, WTRG Economics (www.wtrg.com)

Current OPEC spare capacity would suggest a lower world oil price, but the distribution of this spare capacity could be one reason why oil prices are higher than many experts think it should be.

Usually the more spare capacity (supply) in a market there is the lower the price – simple economics. But the reality is that Saudi Arabia is the only country in the world with significant spare capacity to produce more oil in the world and influence prices. And they currently favour a $70-$80 barrel oil price.

In 2003, OPEC had 2 million barrels a day LESS spare capacity it has now, and oil was under $40/barrel – but spare capacity was more evenly spread out among the 11 member states.

If everybody has spare capacity, the potential for cheating on production quotas is greatly increased and that carries a higher downside risk for prices. Should the world economy grow more quickly, only the Saudis have the ability to increase production enough to meet demand and influence prices. (more)

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