How Much Spare Capacity Does Saudi Arabia Really Have?
Saudi Arabia has pledged to cover any supply gap that may emerge as Iranian oil goes offline, but how much spare capacity does it really have?
The massive reserve of spare capacity located in the Saudi desert is the stuff of legend, taken as gospel in the world of oil. After all, Saudi Arabia is the only country in the world that can ramp up or down millions of barrels of production on short notice. And the Saudis have never let us down.
But Saudi Arabia’s mythical spare capacity may finally be tested. Saudi officials insist that they can produce up to between 12.0 and 12.5 million barrels per day (mb/d) if needed. With output at about 10.4 mb/d in August, the latest month for which data is available, that suggests that they have around 1.5 to 2 mb/d of spare capacity.
Not everyone buys that figure. Indeed, the precise amount of spare capacity has been the subject of much debate for years and even decades. Now, because Iranian supply is going offline at a rapid clip, the world may soon find out if Saudi Arabia’s confidence is backed up by reality or if it has all been a bunch of bluster.
The EIA says that total OPEC spare capacity is set to average 1.49 mb/d in the fourth quarter, which is rather low by historical standards. The EIA sees OPEC spare capacity falling to 1.19 mb/d by the fourth quarter of 2019.
There are a few times in the relatively recent past when spare capacity was that low, including two years ago, when spare capacity plunged to 1 mb/d. However, this was during the depths of the oil market downturn, and it was a reflection of Saudi Arabia producing flat out in order to flood the market in an attempt to edge out U.S. shale. Spare capacity was low, but there was a glut of supply.
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