OREANDA-NEWS. November 10, 2015. Platts Energy Economist Managing Editor Ross McCracken takes a look at OPEC’s spare crude production capacity. Much has been made recently of the US’ new spare capacity, but OPEC’s role has also shifted, as he explains.

OPEC’s spare production capacity is estimated by the US Energy Information Administration at 1.54 million b/d, a mere 180,000 b/d above the level reached in 2008 when oil prices hit their record high. But don’t panic! Oil inventories are at very high levels. The International Energy Agency puts global oil stocks at 147 million barrels, which it notes could notionally deliver 1.6 million b/d for just over 90 days in the event of a major supply disruption.

Meanwhile, the North Dakota Department of Mineral Resources reports that the number of drilled but uncompleted wells in the state hit 993 in August. According to Platts unit Bentek Energy, these wells if brought on-stream would add 591,000 b/d to Bakken crude production (again, notionally).

This represents a major change in the oil market. Spare capacity is no longer solely held by OPEC, but is split between the Middle East, principally Saudi Arabia, and the drilled but uncompleted wells in US shale plays. Moreover, this is backed by the growth in oil inventories, which is not just a function of the market’s current oversupply, but also structural, represented by the construction and filling of storage capacity in China, which the IEA says accounts for 60 million barrels of the 147 million barrel total.

It is an important change. OPEC’s spare capacity has a number of functions. It demonstrates visibly that the organization has the means to change output levels at short notice i.e. that its market interventions are effective. It acts as a disincentive to non-OPEC investment and to some extent helps to protect OPEC’s market share. And it provides OPEC with legitimacy. OPEC has invested — at considerable cost — in assets that could be used in the event of a supply disruption. OPEC was doing the world a favor, even if its spare capacity was also one of the tools in the cartel took kit.

OPEC’s current course, if taken to its logical conclusion, is that it runs down its spare capacity to zero, in the process taking market share from non-OPEC producers. The US’ uncompleted wells are a temporary phenomenon. How and when this spare capacity is used is no longer the strategic decision of a cartel, but a direct function of price. Over the longer-term private companies have no incentive to invest in non-productive assets.

Assuming that the market eventually rebalances — that investment and then supply falls causing prices to rise — it is the uncompleted wells that will come on-stream first. Restoring the investment momentum behind deepwater drilling or Canadian oil sands to a point where supply starts to rise again will take years, just as those modes of oil production are taking time to slow down in the face of low prices.

But where will the spare capacity be then? Where will be the buffer that protects the world’s oil supply from events like the Iran-Iraq war, the rise of Islamic State or implosion of Libya?

Better keep building storage because while OPEC may have been serving its own interests, it really was doing the world a favor. And better keep investing in shale unless the market wants the volatility implied by an industry where the majority of production is still victim to the boom and bust of a long and slow investment cycle. Few will rue the end of OPEC’s cartel behavior, but they might also miss its spare capacity.