LONDON: The oil industry will face the biggest squeeze on its spare production capacity in more than three decades if OPEC and its allies agree next week to hike crude output, leaving the world more at risk of a price spike from any supply disruption.
Spare capacity is the extra production oil producing states can bring onstream and sustain at short notice, providing global markets with a cushion in the event of natural disaster, conflict or any other cause of an unplanned supply outage.
That buffer could shrink from more than 3 percent of global demand now to about 2 percent, its lowest since at least 1984, if the Organization of the Petroleum Exporting Countries, Russia and other producers decide to increase output when they meet on June 22-23, US bank Jefferies said.
“You would essentially be taking 3.2 million barrels per day (bpd) of spare capacity down to approximately 2 million bpd,” Jefferies analyst Jason Gammel said, adding global demand was 100 million bpd.
Some analysts say spare capacity could even fall below 2 percent, after years of low oil prices drove down investment in new production across the industry.
Saudi Arabia, OPEC’s de facto leader which has indicated its support for hiking output at next week’s meeting in Vienna, has said it is alert to the potential squeeze on the market.
“We are concerned about tight spare capacity nowadays,” Saudi Energy Minister Khalid Al-Falih said last month, although he also said the industry was in “better shape” than in 2016 when oil prices plunged below $30 a barrel.
OPEC and its allies have been curbing supply since January 2017 to boost oil prices and cut bloated global inventories. The price of crude has since surged, climbing above $80 a barrel last month, while inventories have also fallen.
But falling inventories, which have now dropped back to around their five-year average in industrialized nations, adds to the conundrum facing OPEC.
“Today we no longer have an inventory cushion or a large spare capacity,” Claudio Descalzi, chief executive of Italy’s Eni, said in January. “In this context, any geopolitical event can create a price spike.”
Oil prices have faced one jolt already this year. A US decision to pull out from an international nuclear deal with Iran and reimpose sanctions helped prices climb to their highest since 2014. Sliding Venezuelan output has added to supply concerns.
“The high level of inventory over the past few years has meant that the market did not need to react to rising political risk, because the inventory was effectively the same thing as spare capacity,” Gammel of Jefferies bank said.
Iran’s OPEC governor, Hossein Kazempour Ardebili, said last week that the oil price could jump to $140 if US sanctions hurt his oil exports from this country, the third biggest producer in OPEC behind Saudi Arabia and Iraq.
Benchmark Brent crude is now trading above $76.
Martijn Rats, Morgan Stanley’s global oil strategist, said oil prices would be supported “if supply and demand is in balance, if inventories have drawn significantly and spare capacity isn’t all that great.”
The precise level of spare capacity available depends in part on how it is defined.
The Paris-based International Energy Agency, which bases its figures on oil production that can be brought onstream within 90 days and sustained for an extended period, estimates OPEC’s spare production capacity was 3.47 million bpd in April, with Saudi Arabia accounting for roughly 60 percent.
The US Energy Information Administration (EIA), which defines it as production that can be brought online for 30 days and sustained for at least 90 days, put OPEC’s spare capacity at 1.91 million bpd in the first quarter.
Based on the EIA definition, Robert McNally at consultancy Rapidan Energy Group said Saudi Arabia, Russia, Kuwait and United Arab Emirates together had spare capacity of about 2.3 million bpd.
“So were they to raise by 1 million bpd, then 1.3 million bpd is left, scraping the low end of the range historically and uncomfortably tight given the high and rising geopolitical disruption risk,” McNally said. But OPEC, Russia and others have said any increase in output would be made gradually.
Consultancy Energy Aspects said Gulf OPEC members would likely add less than 1 million bpd immediately, rising to about 1.5 million bpd in three to six months.
Energy Aspects analyst Sam Alderson said he expected OPEC and Russia to add about 500,000 bpd of production in the second half of 2018, which would reduce spare capacity as a percentage of demand to about 1.75 percent by December 2018. Saudi Arabia, with the bulk of the world’s spare capacity, has said it would need 90 days to move rigs to drill new wells and raise production to 12 million or 12.5 million bpd. The kingdom’s output in May was about 10 million bpd.
But Saudi Arabia could even boost production beyond its stated output capacity of about 12.5 million bpd, possibly adding another 1 million bpd of what is known as surge capacity.
The kingdom did this during wars in the Gulf and Iraq, but the surge in output was only sustained for a few months.
Oil buffer to hit historic lows if OPEC, allies raise production
Oil buffer to hit historic lows if OPEC, allies raise production
- Spare capacity is the extra production oil producing states can bring onstream and sustain at short notice
- The precise level of spare capacity available depends in part on how it is defined
World must prioritize resilience over disruption, economic experts warn
- Al-Jadaan said that much of the anxiety dominating markets reflected a world that had already been shifting for years
- Pointing to Asia and the Gulf, Al-Jadaan said that some countries had already built models based on diversification and resilience
DAVOS: Saudi Arabia’s Finance Minister Mohammed Al-Jadaan urged policymakers and investors to “mute the noise” and focus on resilience, as global leaders gathered in Davos on Friday against a backdrop of trade tensions, geopolitical uncertainty and rapid technological change.
Speaking on the final day of the World Economic Forum in Davos, Al-Jadaan said that much of the anxiety dominating markets reflected a world that had already been shifting for years.
“We need to define who ‘we’ are in this so-called new world order,” he said, arguing that many emerging economies had been adapting to a more fragmented global system for decades.
Pointing to Asia and the Gulf, Al-Jadaan said that some countries had already built models based on diversification and resilience. In energy markets, he pointed out that the focus should remain on balancing supply and demand in a way that incentivized investment without harming the global economy.
“Our role in OPEC is to stabilize the market,” he said.
His remarks were echoed by Saudi Arabia’s Minister of Economy and Planning Faisal Alibrahim, who said that uncertainty had weighed heavily on growth, investment and geopolitical risk, but that reality had proven more resilient.
“The economy has adjusted and continues to move forward,” Alibrahim said.
Alibrahim warned that pragmatism had become scarce, trust increasingly transactional, and collaboration more fragile. “Stability cannot be quickly built or bought,” he said.
Alibrahim called for a shift away from preserving the status quo towards the practical ingredients that made cooperation work, stressing discipline and long-term thinking even when views diverged.
Quoting Saudi Arabia’s founding King Abdulaziz Al-Saud, he added: “Facing challenges requires strength and confidence, there is no virtue in weakness. We cannot sit idle.”
President of the European Central Bank Christine Lagarde stressed the importance of distinguishing meaningful data from headline noise, saying: “Our duty as central bankers is to separate the signal from the noise. The real numbers are growth numbers not nominal ones.”
Managing Director of the IMF Kristalina Georgieva echoed Lagarde’s sentiments, saying that the world had entered a more “shock prone” environment shaped by technology and geopolitics.
Director General of the World Trade Organization Ngozi Okonjo-Iweala said that the global trade systems currently in place were remarkably resilient, pointing out that 72 percent of global trade continued despite disruptions.
She urged governments and businesses, however, to avoid overreacting.
Okonjo Iweala said that a return to the old order was unlikely, but trade would remain essential. Georgieva agreed, saying global trade would continue, albeit in a different form.
Georgieva warned that AI would accelerate economic transformation at an unprecedented speed. The IMF expects 60 percent of jobs to be affected by AI, either enhanced or displaced, with entry-level roles and middle-class workers facing the greatest pressure.
Lagarde warned that without cooperation, capital and data flows would suffer, undermining productivity and growth.
Al-Jadaan said that power dynamics had always shaped global relations, but dialogue remained essential. “The fact that thousands of leaders came here says something,” he said. “Some things cannot be done alone.”
In another session titled Geopolitical Risks Outlook for 2026, former US Democratic representative Jane Harman said that because of AI, the world was safer in some ways but worse off in others.
“I think AI can make the world riskier if it gets in the wrong hands and is used without guardrails to kill all of us. But AI also has enormous promise. AI may be a development tool that moves the third world ahead faster than our world, which has pretty messy politics,” she said.
American economist Eswar Prasad said that currently the world was in a “doom loop.”
Prasad said that the global economy was stuck in a negative-feedback loop and economics, domestic politics and geopolitics were only bringing out the worst in each other.
“Technology could lead to shared prosperity but what we are seeing is much more concentration of economic and financial power within and between countries, potentially making it a destabilizing force,” he said.
Prasad predicted that AI and tech development would impact growing economies the most. But he said that there was uncertainty about whether these developments would create job opportunities and growth in developing countries.
Professor of international political economy at the University of New South Wales in Australia, Elizabeth Thurbon, said that China was driving a Green Energy transition in a way that should be modeled by the rest of the world.
“The Chinese government is using the Green Energy Transition to boost energy security and is manufacturing its own energy to reduce reliance on fossil fuel imports,” she explained.
Thurbon said that China was using this transition to boost economic security, social security and geostrategic security. She viewed this as a huge security-enhancing opportunity and every country had the ability to use the energy transition as a national security multiplier.
“We are seeing an enormous dynamism across emerging market economies driven by China. This boom loop is being driven by enormous investments in green energy. Two-thirds of global investment flowing into renewable energy is driven largely by China,” she said.
Thurbon said that China was taking an interesting approach to building relationships with countries by putting economic engagement on the forefront of what they had to offer.
“China is doing all it can to ensure economic partnership with emerging economies are productive. It’s important to approach alliances as not just political alliances but investment in economy, future and the flourishment of a state,” she said.
The panel criticized global economic treaties and laws, and expressed the need for immediate reforms in economic governing bodies.
“If you are a developing economy, the rules of the WTO, for example, are not helpful for you to develop. A lot of the rules make it difficult to pursue an economic development agenda. These regulations are not allowing the economies to grow,” Thurbon said.
“Serious reform must be made in international trade agreements, economic bodies and rules and guidelines,” she added.
Prasad echoed this sentiment and said there was a need for national and international reform in global economic institutions.
“These institutions are not working very well so we can reconfigure them or rebuild them from scratch. But unfortunately the task of rebuilding falls into the hands of those who are shredding them,” he said.
WEF attendees were invited to join the Global Collaboration and Growth meeting to be held in Saudi Arabia in April 2026 to continue addressing the complex global challenges and engage in dialogue.
