Interview: Abdalla Salem El Badri
How will a fragile global economy and slower growth in oil demand affect production quotas?
ABDALLA SALEM EL BADRI: According to the secretariat’s January 2012 “Monthly Oil Market Report”, global demand growth is forecast at 1.1m barrels per day (bpd) for 2012, following growth of 900,000 bpd in 2011. Non-OPEC supply is expected to grow by 700,000 bpd in 2012, with the greatest contributions coming from Brazil, the US, Canada and Colombia. This places demand estimates for OPEC crude at 30.1m bpd for 2012, roughly the same as 2011. Of course, these forecasts will be further influenced by the global economic recovery, particularly in the eurozone, as well as events in the Middle East. Given the inherent uncertainty in predicting future supply and demand paths, it is impossible to determine the impact on OPEC production allocations. Decisions are made by the OPEC conference, which will continue to work towards market stability.
To what degree is an emerging Iraq set to alter the dynamics of regional energy production?
EL BADRI: Iraq is one of OPEC’s founders and a very important participant in the global energy market. The Iraqi oil industry, which is currently being rebuilt, has the potential to be a cornerstone of Iraq’s economic recovery. OPEC member countries will invest about $300bn in upstream projects over the next five years. This will generate about 7m bpd in additional oil and oil-related products, although some projects could be delayed beyond 2015 if affected by the global economic situation, uncertainties in the Middle East and North Africa region, or price volatility.
Of course, Iraq is expected to see some significant investments as it looks to increase its production capacity. I am confident that OPEC’s production allocation system will successfully accommodate this growth. The impact of an increase in Iraq’s production on the oil market is impossible to determine at the moment, as it will depend on an array of different factors and on the state of the global economy.
What range of prices do you feel properly represents the actual value of oil? To what extent are regional events affecting this value?
EL BADRI: In recent years oil prices have become much more affected by financial markets and speculative activity than in the past, pushing prices beyond levels justified by fundamentals. In 2011 we observed price increases in the first quarter, with speculator activity on the Nymex surging to record highs and open interest for the Nymex WTI (light crude oil) reaching unprecedented levels. A variety of factors contributed to this sharp increase, such as worries about the global economy and concerns that unfolding events in parts of North Africa and the Middle East would further contribute to a deterioration of supply.
Today, I think that oil prices will remain around $100 per barrel, except when affected by unforeseen events.
It is evident that events in the Middle East, the euro debt crisis and the pace of the global economic recovery may bring about significant risks, both this year and in 2013. I should emphasise here, however, that OPEC does not set price targets.
What measures has OPEC taken to approach the question of price volatility in the oil market?
EL BADRI: Such volatility is detrimental to both the oil industry and the global economy. Price stability – avoiding extremes that are too high or too low – is very important for OPEC. We have been recently involved in a number of forums with the International Energy Agency and the International Energy Forum aimed at helping to deepen the understanding of the linkages between physical and financial markets. Over the past few years the EU-OPEC energy dialogue has also proved to be an effective platform for discussions on the impact financial markets have on price volatility. OPEC is doing all it can for market stability. In December 2011, OPEC agreed to a production level of 30m bpd. That figure was agreed by our ministers as the level the market was indicating for OPEC crude.
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