New Study Says OPEC Oil Production Capacity Declined 36% Since 1979

The ability of the Organization of Petroleum Exporting Countries to produce oil has tumbled by some 36% since 1979, with striking declines in Saudi Arabia and Kuwait, according to a report commissioned by the U.S. Department of Energy.

While estimates of total oil reserves in the 13 nations have grown sharply, their capacity to produce oil day in and day out has withered because of weak demand for their oil and budget problems caused by low prices, the report said.

The report by the government-funded East-West Center in Honolulu said the shrunken capacity, combined with swelling demand for OPEC oil, could point to significant world oil price increases as early as 1991.

“Two or three more years of demand growth like this and we are in a different era,” said Fereidun Fesharaki, director of the energy program at the East-West Center, who headed up the study.

It is not news that OPEC’s capacity to produce oil has declined since the cartel’s salad days of the 1970s. But the study’s estimate that it has plunged to about 25 million barrels per day, from a peak of 39 million, indicates a steeper decline than previously estimated.

The Reagan Administration’s report on energy security last year, for example, put capacity at more than 28 million barrels a day.

If the lower figure is correct, it means that there is a smaller gap between OPEC’s current output of oil and its capacity than most analysts realized. That suggests less short-term flexibility to respond to interruptions in oil supply and to upward pressure on prices, said the report.

It suggests that the United States and other oil-importing nations pressure friendly nations within OPEC to maintain a higher production capacity as protection for industrialized nations against a sudden interruption of oil supplies.

“If Kuwait wants us to protect their ships, maybe we should say, fine, you maintain capacity of 2.5 million barrels a day,” said Fesharaki, a former adviser to Iran’s pre-revolution oil ministry who toured the Middle East in compiling the study.

Kuwait has let its production capacity drop to about 1.7 million barrels a day from 3.3 million a decade ago, the study concluded. The Saudis have let capacity plunge by 60%, to 6.5 million barrels a day from 10.8 million in 1979, the report said.

Its authors bill their report as the first thorough look at the oil capacity picture--treated as a state secret by many government oil companies--in many years. Last summer’s Iran-Iraq cease fire opened up many channels of information, they said.

Energy Department officials wouldn’t comment on the report except to say they will publish it with “minor changes” and a disclaimer that the government wasn’t endorsing its conclusions. But a government analyst commented, “If we thought it was nuts, we wouldn’t be publishing it.”

The existence of idle production capacity elsewhere in the world is often cited as a reason that the United States will continue to enjoy plentiful supplies and moderate prices for many years, despite a big decline in U.S. oil production and growing reliance on imported oil.

Most students of OPEC believe that the cartel’s power over oil prices takes hold when the demand for its oil exceeds 80% of its production capacity. That condition prevailed at the time of the Arab oil embargo in 1973-74 and the Iranian revolution in 1979.

But plummeting demand for the cartel’s oil in the 1980s, from 31 million barrels a day to as low as 15.5 million barrels a day in 1985, changed the picture dramatically. Estimates of the demand for OPEC oil in the past few years have ranged from 55%-65% of capacity.

The recent report to DOE, however, implied that OPEC’s production last year amounted to 78% of the cartel’s capacity, far closer to the threshold than had been believed.

“It goes directly contrary to all the reports we’ve been hearing about the big increases in OPEC oil reserves, and it leaves the public confused,” said Joseph Story, a McLean, Va., oil consultant and expert on Saudi Arabia. “But the basic thrust--that the availability of oil has actually shrunk--is right.” The decline in output capability has resulted from cutbacks in exploration and development, the halt of projects to maintain or boost the recovery of oil from old fields, closure of entire oil fields and other steps, most of which can be reversed with time and money.

The Saudis especially are equipped to boost their capacity quickly by 1.5 million barrels a day, the report figures.

But it asserted that the physical production capacity has become less important than what the report describes as the cartel members’ “preferred” production level--a level that each nation “could live with” under current economic and supply-demand conditions.

Describing the Persian Gulf members of OPEC as increasingly concerned about conserving their oil resources, the study put the “preferred” level of output at about 21.5 million barrels a day, not far above last year’s average production of 19.6 million.

“We should be much more concerned with approaching production levels toward the preferred output than total physical capacity,” the study declared.