LONDON (From THE DRILL, A Dow Jones Investment Banker Column), Feb. 8, 2010
It will be 50 years in September since the Organization of Petroleum Exporting Countries was created in Baghdad with five founding member countries.
The intervening years have seen it grow to 12 members and evolve from the sharply politicized organization of the 1970s to a broadly economic one in more recent years. The majority of the world's oil reserves are held by OPEC's state-run oil companies.
In January 2007, Abdalla El-Badri, a former deputy prime minister of Libya, became OPEC's Secretary General, running the body day-to-day. Notwithstanding the Organization of Arab Petroleum Exporting Countries-induced oil embargo that crippled customers in the 1970s, he was to experience one of its most volatile periods in its history.
Eighteen months after he took up the role, in July 2008, oil prices blew out to more than $147 a barrel on surging demand among emerging economies, a wave of financial investments in commodities and thin margins of spare capacity. Yet within five months, as the economic downturn bit, prices folded to less than $33 a barrel.
Mr. El-Badri has consistently held the view that oil prices have become disconnected from the reality of supply versus demand due to the role of speculators. His view has been fueled by a spring back in oil prices to almost $84 a barrel earlier this year despite a 1.6% year-on-year fall in oil demand in 2009.
In January, the U.S. Commodity Futures Trading Commission proposed to limit speculation on energy futures, with trading limits on physically and financially settled oil, natural gas, heating oil and gasoline futures and options contracts. The limits are high and would, if introduced, affect only a handful of traders in the commodities markets.
Today, Mr. El-Badri says "unless we eliminate the outside factors that affect the oil price we will live with volatility for another two or three years. What we see coming from the States is a positive decision and a step in the right direction."
The 69-year-old, a New England Patriots fan, is a native of the Libyan coastal city of Benghazi, studied accounting and business administration at Florida Southern College and worked in his early years at Esso Standard before it became ExxonMobil.
DJIB: There are enormous amounts of oil being stored in ships around the world and yet oil prices are high. Why?
Mr. El-Badri: It's very difficult to eliminate speculation. We have around 140 to 150 million barrels of oil in floating storage and commercial stocks (to last) about 60 days. The first and second quarters of this year will be very, very difficult. We at OPEC have to be very careful as far as OPEC compliance is concerned. Demand will pick up in the second and third quarter and then demand will stabilize. It is another hint that consumption is less than what it should be. Demand is still shaky.
DJIB: In what way is OPEC better now than in its early years?
Mr. El-Badri: We are more mature. We can forecast better. We have accumulated experience and now we can contribute positively to the oil market. We can also assure the world that we are capable of supplying the oil for the future.
DJIB: When you joined as Secretary General in 2007, what was the most significant change you made?
Mr. El-Badri: We needed more accurate data and better forecasts because the oil market had become very sophisticated and very difficult. What I tried to do was (improve) the research side, make people one family and ensure everybody should contribute to the best of their ability.
DJIB: Your members have different political and economic agendas. Some have even been at war with each other. What unites them?
Mr. El-Badri: All have one objective, which is to protect their interest, their income and the wealth of their countries.
DJIB: Oil prices have whipsawed in the last two years. How do you manage expectations about your role and influence?
Mr. El-Badri: It was nothing to do with fundamentals. Speculation is really the main reason. A $147 price we don't favor, a $30 price we don't favor. We have to study this problem and try to come up with a reasonable price where we will not be influenced by a very high price and a very low price.
DJIB: What lessons do you draw from the credit crisis?
Mr. El-Badri: The world is more sophisticated, more equipped to handle a crisis and I am still very surprised that we weren't able to detect this crisis. It isn't 1930. It's 2006 or 2007. Can we prevent this in future? We should not let this happen.
DJIB: In Libya, you worked under sanctions. Do they work?
Mr. El-Badri: For 18 years we were under embargo, under sanctions. Sanctions never worked. We organized very well, the whole country was prepared. The embargo had some impact but it didn't really work.
Copyright (c) 2010 Dow Jones & Company, Inc.
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