While a certain country needs to develop the capacity

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Unformatted text preview: e supply-sided problems. Some observers have even called spare capacity “the most important single asset for the world’s supply security” (Harks 2010:253). Most of the world’s spare capacity is currently held by Saudi Arabia. How crucial Saudi Arabia’s spare capacity is for world markets has particularly become evident in the first Gulf War, during which Riyadh considerably ramped up production to buffer the supply losses from Iraq and Kuwait. As a consequence, price impacts have remained rather modest. Yet, reserve capacity, as strategic stocks, has a public goods character. While a certain country needs to develop the capacity and pay for it, no market participant can be excluded from the benefits of this additional, supply-sided buffer. In addition, for the producer country holding reserve capacity, this additional capacity costs money but does not create any return on investment. As such, and according to theory, reserve capacity should not exist. The primary reason why Saudi Arabia is apparently willing to bear related costs but socialize the benefits is that reserve capacity is a welcome tool to enforce discipline within OPEC. The sheer fact that Saudi Arabia can threaten its fellow oil producers to create an oil glut, similar to the one in 1986, gives this country an unmatched power status within the cartel. A second reason may lie in the fact that Saudi Arabia, the world’s largest reserve holder, has an interest in keeping consumers “hooked” on oil for decades to come. Hence, holding reserve capacity is an investment it makes in future demand security, enabling Riyadh to calm down markets and stabilize prices at an affordable level for consumers.15 In other words, holding reserve capacity is still a highly rational move for the Saudis, but the underlying rationale is of a different nature than the one primarily discussed here. 70 Oil DDW 2012 1 Turns Warming 71 Last printed 9/4/2009 7:00:00 PM Oil DDW 2012 1 Renewable energies cause oil to get pumped at unbeatable prices – That makes warming net worse Wirl, Faculty of Business, Economics and Statistics, University, 12 Franz Wirl, Faculty of Business, Economics and Statistics, University, 12, [“OPEC’s Strategies,” http://www.springerlink.com/content/w37411k763748224/] E. Liu Uncertainty about future oil markets—environmental constraints due to global warming, the threat from (cheap?) backstops, the demand growth in emerging markets— requires assessing the risk associated with certain strategies, say high prices, for the long run prospects. After all, coal is since decades continuously replaced, almost phased out in most of its uses except for power and steel, although the production/reserve ratio is far above 100 years (BP 2011).3 Indeed some OPEC decision makers were at times scared that oil may face a similar fate and that substantial amounts remain unsold. First that high oil prices trigger the development of cheap backstops and then that global warming will limit oil sales. Such risks hold in particular for very large reserve holders like Saudi Arabia because they would bear the major consequences if oil were priced out of the market. This...
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