Oil has hit another record, almost reaching $140 a barrel this week. The latest spike was caused by a fire at a Norwegian North Sea oil field. Prices then subsided on reports that Saudi Arabia, the only oil producer in a position to expand output fast, is set to boost supplies this weekend.
The fear in Saudi Arabia is that high prices will crimp demand for oil and spur investment in alternative energy, undercutting future demand, said Neil King in The Wall Street Journal. The increase is expected to be around 250,000 barrels per day (bpd), taking output to 9.7 million barrels a day, a 27-year high.
Will this help? As Barclays Capital noted, it won’t do much to offset “significant output losses” in other Opec nations. A strike in Nigeria could still go ahead, resulting in 350,000 bpd being lost. The Norwegian oil field fire has cost 150,000 barrels a day. The production boost also means delving into Saudi Arabia’s “already thin” spare capacity, as King said; current production capacity is 11.4 million bpd.
If Saudi Arabia were to raise production by 500,000, as has been rumoured, in order to give the move a greater impact on the market, its spare capacity would be just 1.4 million, said Jamie Chisholm in the FT. That’s so little that a major supply shock, such as a terrorist attack or another Hurricane Katrina, would cause a sharp spike. And then there would be “no more ammunition” to restrain the bulls.