|SPerhaps the most interesting supply-side
change in 2004 from recent years was the change in the world’s ability to
surge crude oil production to either fill in for unexpected lost supplies
(e.g., Venezuela or Iraq) or simply meet unexpected demand strength.
|SThe graph shows an estimate of surplus
production capacity in OPEC. Since
OPEC is effectively the only area that maintains short-term surplus
production capacity, it represents world surplus capacity available to meet
unexpected changes in supply or demand.
|SAt this point, we seem to have about
1.6-2.0 million barrels per day of extra production capacity – a level
seen during the first Gulf War and briefly after the Venezuelan strike and
the Iraq war in 2003, and a level considerably less than the 3 million
barrels per day or more that has existed for most years since the first Gulf
|SThis lack of capacity surplus is a
fundamental tightness. Note that
the surplus started to settle at about 2 million barrels per day in 2003
before demand required OPEC to increase production, which dropped surplus
capacity to below 1 million barrels per day for much of 2004 before rising
again as OPEC was able to pull back on production.