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Sun 10 Jan 2010 04:00 AM

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Crude logic

OPEC secretary general HE Abdalla Salem El Badri shares his thoughts on the oil market's prices, policies and prospects for 2010.

Crude logic
Crude logic
According to El Badri, a global economic recovery is underway, driven by improved growth in Asia.

In an exclusive interview, OPEC secretary general HE Abdalla Salem El Badri shares his thoughts on the oil market's prices, policies and prospects for 2010.

The dawn of the new decade represents a troubling time for the world's oil producers. Demand has dropped dramatically as a result of the global economic downturn, the slump having had a dramatic effect on consumption. The emerging economic superpowers of China and India have yet to pick up the slack from an ailing US and Europe.

When prices were rising in 2008, many countries were already taking corrective measures to reduce demand, and some of these measures are already bearing results.

At the same time ‘green energy' is becoming increasingly affordable as governments pour more money into its research and development. And as far as consumers are concerned, gas-guzzling monster motors are out, hybrids are in.

Since the financial crisis hit the price of oil has fluctuated wildly, from a low of $30 to a high of $147, and OPEC is under ever greater pressure to keep its crude-rich members in check. The cartel's critics accuse it of reducing output in order to maintain prices, of failing to coordinate its members' crude production schedules, of lying about the true extent of its reserves, and of slowing the move towards green energy.

HE Abdalla Salem El Badri was elected secretary general of the cartel in 2007, having spent many years at the helm of Libya's National Oil Corporation. Today, the 69 year old represents the interests of twelve countries which last year produced oil worth approximately $575bn.

What would a US or Israeli strike on Iran mean for OPEC, its members, and its prices?

"These are not the type of issues which we should speculate about, as OPEC is an oil market focused organisation. However, I sincerely hope no such incident will take place. But as we have seen in the past, if something happens which disrupts oil production and supplies, oil prices will inevitably be pushed higher. I would like to reiterate that I hope this is a situation which will never occur. That region has enough problems now. We should not create any new problems and obstacles.

How much does the uncertainty within key member states (ie. Iraq, Iran, and Nigeria) impact the global energy markets?

"Geopolitics is not a major factor in today's oil market and has not been for quite some time. As a result, there is no geopolitical premium attached to current oil prices. Instead, what we are seeing is a disconnection between oil prices and market fundamentals, as speculative activities continue to drive prices. The oil market is well supplied and there are no concerns over market fundamentals. OPEC currently has over six million barrels a day of spare capacity, which helps to ease any concerns about possible future disruptions."

What are your expectations for the oil price in 2010? You had previously tipped this year for a global economic recovery with subsequent positive oil demand growth - does this still hold true?

"I am always reluctant to forecast oil prices. Predicting oil price movements is never straightforward and the situation is made even more complex at times like now when there is so much volatility in the oil market.

This level of price instability makes it very hard to gauge where prices will be, even in the near future. I can, however, tell you that oil supplies are plentiful and this has been the case for quite some time. Evidence of this can be seen in inventory levels, which remain above their five-year average.

There are also close to 160 million barrels of crude and petroleum products floating at sea. Looking at the global economy, a recovery seems to be underway, largely driven by improved growth in Asia. Global oil demand, meanwhile, has hopefully reached a plateau at bottom with growth expected to resume. Yet despite the overall recovery, regionally, the demand picture remains mixed with a clearer growth trend emerging in non-OECD (Organisation for Economic Cooperation and Development) rather than OECD countries. As a result, we need to remain prudent and take things carefully.

This has been reflected in our policy decisions, which in 2009 showed that we are committed to doing all we can to do our part to assist the global economy in its recovery."

There has been much allusion to the emergence of a new economic world order in the aftermath of the global slowdown, with the BRIC nations and other emerging economies taking the lead. What does this mean for fossil fuel demand and for OPEC?

"As I mentioned, we are already seeing that developing countries like China and India are driving the global economic recovery. In terms of economic growth, China is leading the way, with growth estimated at eight percent last year and 8.5 percent in 2010. India is close behind with 5.6 percent estimated growth for 2009 and 6.5 percent for 2010.

For the past few years, emerging economies like these have led the way in terms of growing energy consumption. As we now move away from recession towards recovery, this trend is expected to continue. On the other hand, in the OECD countries, petroleum demand is expected to level off after decades of robust growth. But this may be offset by the huge amounts of untapped potential that remain in emerging markets, where many people are still without basic energy requirements. As a result, we can expect to see moderate growth in world oil demand." In Europe and the US we are witnessing a renewed drive for cleaner energy supplies; how much of a threat is renewable energy to OPEC's interests?

"I have frequently explained that while OPEC welcomes diversity in the overall energy mix, we believe that alternative sources of fuel and technologies will be slow to materialise and gain a concrete market share. Fossil fuels will remain the predominant source of energy for the foreseeable future. Still, we need to remain mindful about how to proceed.

There is a lot of uncertainty surrounding the future of alternative energy, which in turn creates an enormous challenge for oil producers in general."

OPEC's perception around the world is often that of a ‘big bad wolf' raising prices at the petrol pump and squeezing revenues from the consumer. Do you feel that this is unfair? Should governments be held accountable for rising prices too?

"I have repeatedly said that OPEC doesn't favour oil prices that are too high or too low. Neither is beneficial to producers or consumers. Hence, the Organisation has frequently addressed the factors that underlie such extreme prices and, specifically, has repeatedly spoken of the havoc that speculators create in the oil market. In response, OPEC has consistently sought to keep the oil market well supplied, while ensuring a steady income to oil producers and a fair return to those investing in the petroleum industry.

In addition, there are still many misconceptions about oil price mechanics and the pricing of products such as gasoline. And there is no doubt that purchasing petroleum products is an expensive business. But many people fail to recognise that a number of governments benefit far more from petroleum sales than the actual oil producers. For example, in 2008, the UK government received around 1.8 times more from taxation than what OPEC member countries received from the sale of their oil.

Between 2004 and 2008, the G-7 nations received a total of $3.418 trillion from oil taxation, whereas OPEC member countries received just $3.346 trillion in total revenues during the same time frame.  Therefore, the role of such government taxes on petroleum products should be understood."  

Is Russia a competitor or a partner to OPEC? Is there any prospect of Russia joining the group?

"As you know, Russia is not a member of OPEC but frequently attends our ministerial meetings as an observer. I visited Moscow in October 2008 and hope my Russian colleagues will again visit the OPEC Secretariat in the near future.

We are certainly keen to cooperate with Russia, and to exchange ideas and share oil market information with them in the same way that we do with other countries. As to whether Russia will join OPEC, I can only reiterate what I have said each time I am asked about the possibility of new members joining this Organisation: we do not seek new members but are always happy to talk to any oil-producing countries who are net exporters of petroleum and who express an interest in joining OPEC."

Looking forward, how important is Saudi Arabia to OPEC's future plans? As the world's largest oil exporter, is there a prospect of its influence increasing within the group?

"The future plans of the Organisation and the strategies of each of our twelve member countries are certainly important. And Saudi Arabia, as the Organisation's largest producer, is naturally an important member of OPEC and holds the bulk of the group's spare capacity. But when it comes to decision-making within OPEC, all agreements are made unanimously. All OPEC member countries are equal and have the same degree of influence within the Organisation."

How difficult is it to manage the internal relations between OPEC members - keeping them to their quotas and ensuring that disputes are settled amicably?

"Each of our members recognises the importance of a stable oil market and an environment which is conducive to both producers and consumers. It is imperative that member countries determine the best way to safeguard their interests individually and, also, collectively.

When a policy decision is made by the Ministerial Conference, all members are obliged to adhere to their production allocations. Compliance was excellent during 2009. In March of last year, compliance was at an historical high of 77 percent. For the whole of 2009, compliance averaged 65 percent. It could, however be better. I always urge member countries to adhere to their production allocations.

Has the low oil price in late 2008 and the first half of 2009 derailed necessary investment in future supplies, stymieing oilfield development or the introduction of new technology?

"The global recession and the low-price environment forced OPEC members to collectively delay or cancel around 35 upstream projects in late 2008 and early 2009. However, with the rise in oil prices in recent months, we are seeing a gradua l recovery in demand and several of these projects are now moving forward again.

Overall, OPEC remains committed to its near-term and long-term investment plans. But we need a price than enables us to explore and develop our oil reserves. An oil price of less than $75 a barrel makes investments less feasible. And, of course, we still have concerns about longer term demand. Consumers want security of supply but, at the same time, we producers need security of demand."

And finally, do you own, or would you ever drive, a hybrid car?

"I don't currently own a car in Vienna and when I am not travelling by car, I try to walk as much as I can. Vienna is such an easy city in which to walk and its beautiful architecture and scenery make walking a pleasure. I am not opposed to hybrid cars but I can't say whether I would ever drive a hybrid car in the future. From what I understand, however, hybrids are far costlier to produce than high-volume cars."

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