There is no excess capacity outside of OPEC. With high prices non-OPEC producers pump as much oil as they can. Even when prices are low there is seldom more than 500,000 barrels of spare capacity outside the confines of OPEC. Within OPEC, six of the OPEC 10 are producing at capacity and of the four members with spare capacity Saudi Arabia has 80 percent of the excess. From a global security standpoint Saudi Arabia defines the point of greatest risk. 

If a pipeline attack occurred in Saudi Arabia and as little as 10 percent of its production was halted there is not enough capacity in the rest of the world to make up the difference. If all Saudi production was off the market the worst predictions of the most pessimistic would turn out to look conservative and release of crude from government reserves would only have a modest impact on the ensuing price spike.

We are not predicting an attack or revolution within Saudi Arabia with such devastating consequences but nether can we rule one out. 

Our other major risks on the upside to oil prices are civil unrest in Venezuela  associated with the upcoming recall vote, if it is allowed to happen, and ethnic conflict in Nigeria.

Meanwhile OPEC members are worried about the downside risk. December 4, 2003 OPEC is scheduled to hold its 128th meeting in Vienna, Austria to review oil markets. The focus will be on production cuts to coincide with the seasonal drop in 2nd quarter petroleum demand. Total petroleum demand (crude, condensate and natural gas liquids) will drop off by close to 3 million barrels in the 2nd quarter following the winter heating season.

Libya is asking for a higher quota and may request it at the upcoming meeting. Algeria and Nigeria also want an increase. Venezuela will be defending against a lower quota even though its current capacity is 10 percent below quota. Indonesia is so far below quota that its opinion will hold little weight. We doubt that the issue will even be addressed on December 4. It will be too difficult to deal with before some stabilization in Iraq.