Geopolitical disruptions and lower than anticipated output from Libya, Iraq, and Nigeria are contributing to an overall thinning of global spare oil capacity.

“We are at level of spare capacity that is pretty thin and doesn’t leave a lot of little wiggle room for any unexpected supply shortages,” Aaron Brady, senior director forIHS, said during the company’s energy forum. OPEC spare capacity – defined as spare capacity held by Saudi Arabia, the United Arab Emirates (UAE), and Kuwait – has dropped from just less than 5 MMb/d in January 2011 to between 2 MMb/d and 2.5 MMb/d in August 2013. “That’s the lower level of what the oil market is comfortable with.”

Information presented during the IHS Forum session on global crude oil and refined products markets showed that OPEC Gulf producers are producing at near record highs to make up for the shortfalls elsewhere. Combined, Saudia Arabia, Kuwait, and the UAE produced about just more than 15.5 MMb/d in July 2013, up from about 14.5 MMb/d in January 2013. Production from the rest of OPEC dropped to about 15 MMb/d from just less than 16 MMb/d during the same time period.

Geopolitical-driven supply disruptions are mostly to blame for the production declines, according to IHS. Libyan production has collapsed in the last few months, and uncertainty remains about when production will return to the impressive levels reached following the fall of the Mu’ammar al-Qadhafi regime. In addition, IHS is pessimistic about Iraqi production growth. The firm was expecting 200,000 b/d to 300,000 b/d of annual growth from Iraq over the next few years, but IHS now anticipates output to drop next year, which in turn will impact the region’s spare capacity.

Assuming lower supplies from Iraq and Libya, IHS foresees a spare capacity of 3.5 MMb/d in 2015, about 1 MMb/d less than its previous forecast.

“The clear message is that political stability in the Middle East and North Africa is worsening. We’re starting to think that maybe the market will carry more of a fear premium in the oil price than it otherwise would have without the situation in Syria, without the situation in Egypt, etc.,” Brady said. However, “That’s being counterbalanced by the North American supply surge.  … That is a crucial balancing factor in the market.”

Tight oil production growth in North America has helped to fill gaps worldwide thanks to use of the same hydraulic fracturing and horizontal drilling techniques that led to plentiful shale gas supplies.

“Canadian oil sands are part of it, but clearly the tight oil revolution in both the US and Canada is the big story. Imagine how the oil market might look today if we had not had the MMb/d year-over-year growth that we are seeing out of the US,” Brady said. “If we had not had the extra supply, given all of the outages that we are seeing right now in the OPEC countries and the non-OPEC countries that we’ve seen over the past year and a half, I think it’s safe to say that oil prices would be a lot higher than they are right now.”

The potential impact would be even greater if tight oil plays worldwide were developed, leading to significant supplies.

“There is a tremendous amount of tight oil potential around the world, but it’s going to take time to develop,” said Jim Burkhard, vice president, IHS.

IHS’s recently released Global Tight Oil Study identified potential sources of tight oil. These include Europe, 27 play areas; North Asia, 26; South Asia, 20; Australasia, 17; the Middle East, 16; Africa, 15; South America, 14; and CIS, 13. The study revealed that the potential technically recoverable resources of these 148 plays could be nearly 300 Bbbl.

“While it is too early to assess the proportion of this that could be commercially recovered, the potential is significant compared to the commercially recoverable resources of tight oil (43 Bbbl) estimated in North America by previous IHS studies,” IHS said in the release.

The US has proven to be the dominant source of global oil production growth.

“US tight oil is already playing a major role in tempering the upward price pressure,” Burkhard said. “We have been consistently increasing our outlook for tight oil production, so there is lots of growth still ahead of us.”

And that is good news for the energy market, considering the turmoil in parts of the Middle East and North Africa may last longer.

The Arab Spring brought not only the process of regime changes but also the collapsing of states, as central governments and institutions crumbled, creating a vacuum filled with decentralization and subnational groups working on very different basis, said Raad Alkadiri, senior director, petroleum risk sector, IHS. Clashing ideologies persist, and disagreements are crossing borders, with no mediator or central authority to help impose a consensus.

“The structural instability has started to have a contagion effect. It’s beginning to impact countries that are not necessarily going through regime changes but are starting to fill the impact of that regime change,” Alkadiri said. “The Arab Spring in some ways has turned into the Arab Hangover. … The Middle East is starting to look in many places more like Nigeria and Afghanistan than it is looking like Poland or Eastern Europe after the fall of the Berlin Wall.”

And the instability could spread to areas where oil and gas plays – frontier and traditional – are present, he said. This includes the Levant basin, the site of a number of significant number offshore gas discoveries since 1999.

“This is a crisis that is not going to go away easily,” Alkadiri said. However, “not all parts of the Middle East are the same. … In the gulf states, there has been a cohesion that has been maintained.”

Contact the author, Velda Addison, at vaddison@hartenergy.com.