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OPEC Spare Capacity

The difference between actual production and nominal maximum capacity that OPEC could implement within a period of three months. If there is plenty of spare capacity then a business should be able to increase its output without further investment cost. The assumption is that supply will therefore be elastic in response to a change in demand. OPEC spare capacity has been used as a cushion to stabilise oil prices in the past and is regarded as a barometer of likely market price. The very low level of OPEC spare capacity experienced during 2004/5 was one of the main factors that drove up oil prices until 2008. OPEC is now reluctant to invest in spare capacity that serves only to moderate or lower prices. Aggressive versus defensive strategies: However, there is a clear distinction between an aggressive strategy where live production capacity is withdrawn in order to raise prices as demand falls (strategy from late 2008 through 2009). Defensive capacity management strategy occurs where production is shut down to counteract growth in competing non-OPEC supply and to prevent price collapse (1985-2004). OPEC is still in aggressive strategy mode in 2012, with a risk of a switch to de...

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by Yue Pan // 11 November, 2015

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