On the one hand, production had to rise to meet the immediate supply shortage and dampen the oil price. On the other, the organisation wanted to have enough capacity left over to cover a potential Iraqi shut-off. But with spare capacity among the other nine members of around 3.8 million b/d before filling in for Venezuela, that would just not be possible.

The decision they made, like the one at December’s meeting, was not straightforward. Last month, they agreed to increase production quotas to 23 million b/d, which involved a de facto output cut of around 1.7 million b/d. This time, they decided to increase the quotas to 24.5 million b/d, but to include the hamstrung Venezuela in the equation.

‘We are trying our best to get the new production to the market and giving a strong message to consumers that we want to stabilise the market,’ Qatari Energy & Industry Minister and OPEC president Abdulla bin Hamad al-Attiyah told MEED on 13 January. ‘But we have said very clearly that all this additional production is a temporary solution. If Venezuela comes back to the market, we hope it will be adjusted.’

The result: all OPEC members except Iraq, Venezuela and Saudi Arabia will be pumping at full capacity by 1 February – leaving 1.8 million b/d in reserve. If there is conflict in Iraq, OPEC will not be able to cover the gap left in the market, and this could force governments quickly to release their strategic petroleum reserves.

‘If Venezuela is still out in February and Iraq goes at the same time, there will be a supply crunch because stocks are low and already under pressure,’ says Roger Diwan, managing director of markets and countries at the US’ PFC Energy. ‘OPEC can’t replace both at the same time. And even if demand falls in the second quarter there will be a shortage without the Venezuelan oil. All told, stocks will remain low throughout the first half.’

OPEC’s capacity conundrum is made up of three elements beyond the organisation’s control: the strike at Petroleos de Venezuela (PDV – see box); the threat of war in Iraq; and global oil demand in the second quarter.

At one end of the equation, a failure to resolve the PDV strike, combined with a February-March war in Iraq and strong oil demand, could leave the oil market short of around 500,000 b/d for the next two months – entailing sustained drawdowns of private and strategic oil stocks and leaving the market tight for the rest of the year.

In another working of the equation, Venezuelan production could climb back to pre-strike levels by March, which, combined with a peaceful resolution of the Iraq crisis and a heavy seasonal dip in oil demand for the second quarter could create a supply glut – and the corollary effect of an oil price collapse.

‘If Venezuela comes back onto the market, I think OPEC faces a serious downside problem,’ says Leo Drollas of the London-based Centre for Global Energy Studies (CGES). ‘It is pumping at nearly full capacity now and it is always easier to increase production than to trim it.’

For OPEC, the coming months will provide a test greater than any it has faced since the price collapse of 1998. The organisation claims to rank market stability more highly than any other goal and it has always laid down spare capacity as the key to achieving it.

But how much spare capacity does it have? While the African producers are all carrying out capacity expansion campaigns, others have seen their capacities fall. Kuwait, which has twice been hit by major explosions, as well as an array of other capacity-damaging accidents over the past two years, now has an estimated production capacity of 2 million b/d, as opposed to 2.4 million b/d a couple of years ago.

The UAE, another of OPEC’s larger producers, also has capacity concerns. When the organisation last told members to open their spigots as wide as they could, Abu Dhabi – the country’s swing producer – had much less in reserve than expected. It is now thought to have a capacity of about 2.4 million b/d.

The bulk of spare capacity continues to lie with Iran and – most importantly of all – Saudi Arabia, which maintains a capacity of 10.5 million b/d. However, it could take up to 90 days for Saudi Arabia to reach full production.

The real issue is how far the current crisis could have been foreseen. While both the Venezuelan strike and a military campaign against Iraq could have been predicted individually, two such crises rarely strike concurrently. It is also, perhaps, unfair for OPEC to carry the can when any Iraqi export loss will come about as a direct result of military action carried out against the wishes of most OPEC members.

‘It may be touch and go with capacity right now, but you can’t carry around a lot of excess capacity,’ says Drollas. ‘It’s very expensive to maintain and the only reason OPEC can do it is because Saudi Arabia is willing to carry the burden and no other country would do that.’

Once production is running at full capacity, private and government reserves come into play. OECD government stocks contain enough barrels to compensate for a complete shut-off from Venezuela and Iraq for the next six months. Most analysts believe these stocks are already being prepared for release. However, Washington is also considered unlikely to draw down its strategic petroleum reserve unless bombs start to fall over Baghdad.

In all, recent events provide much to ponder for producers and consumers. For OPEC, the question of capacity is once again at the fore. For the West, fears about energy security – a prevailing theme of recent years – are approaching a climax.

As far as GCC suppliers are concerned, OPEC must remain the bedrock of market stability. ‘We have heard lots of scare stories about the security of supply – but these are not real,’ said Al-Attiyah. ‘If you look at recent history, not one cargo in the past 15 years has been delayed from the GCC region. The consumer should check the history of supply and see for himself where it has been disrupted.’