OPECed Out

OPECed OUT….Pretty much everyone is reporting today’s OPEC story the same way, so I’ll choose the New York Times version to excerpt:

In an effort to ease crude prices from the $40-a-barrel level, the Organization of Oil Petroleum Exporting Countries agreed today to a compromise agreement that would increase oil output by 2 million barrels a day, to 25.5 million barrels.

….Analysts said the cartel’s move would probably have the intended effect and push spot oil prices down a bit from current levels.

I’ve been mystified by how OPEC’s decision has been reported over the past few days. Every story passes along the standard interpretation that OPEC is trying to calm down the markets by increasing its production quotas, thus guaranteeing enough oil for everyone.

But OPEC’s quotas are meaningless, as the Times eventually acknowledges:

Participants in the oil market may fear that the production increase announced today will not be sufficient to satisfy current demand, because OPEC members are already producing above their quotas. That means the increase agreed upon today will inject less new production into the market than advertised.

….PetroLogistics Ltd., an energy consulting group, estimated that during May, production from OPEC’s 10 members probably averaged 26.35 million barrels, exceeding the cartel’s limit by 2.85 million barrels.

But even this doesn’t quite tell the story. In fact, there is no spare capacity left and OPEC’s production quotas don’t mean a thing. Everyone except Saudi Arabia is already pumping flat out, and even Saudi Arabia is close to its limit. They are within 2 million barrels per day of their maximum capacity, and this is pretty much the only spare capacity left in the world.

Bottom line: the entire world is already pumping at close to its maximum capacity. Refining capacity is also nearly maxed out. But global demand keeps going up each year by about 2 million barrels per day. By this time next year worldwide demand will probably be equal to worldwide production.

In the near term, the only thing that can change this is a reduction in demand. But what could cause such a reduction? A global recession would do it. An implosion of the Chinese market would do it. Americans driving less and buying more fuel efficient cars in response to high gasoline prices would do it ? although that’s unlikely since Americans have shown themselves impervious to price increases for the past two decades.

From this point forward, we are likely to live in a world in which oil demand is permanently and precariously close to maximum supply, since it’s unlikely that we can increase pumping, pipeline, and refinery capacity faster than the growth in demand. Result: oil prices that are high, unstable, and fantastically sensitive to the slightest disruption in supply. Too bad we didn’t start planning for this a decade ago.

UPDATE: The MSNBC chart above had the wrong units for gasoline consumption. It should be millions of barrels per day, not millions of gallons per month. I’ve photoshopped the correction into the chart. Thanks to reader Buzz P. for pointing it out.