Algeria’s
Chakib Khelil Briefs The Press Ahead Of 1 February OPEC Meeting
Reuters/
Heinz-Peter Bader
Chakib
Khelil, OPEC
president and Algerian Oil Minister
By
MEES
OPEC
president and Algerian Oil Minister Chakib Khelil gave a press
briefing
to selected journalists on the eve of OPEC’s
1 February meeting in Vienna. While outlining his concerns for
the global economy in 2008, he argued against a production increase,
but also ruled out an output cut.
Edited highlights follow:
Q. Can OPEC do anything to avoid a recession?
A.
I think the crisis is primarily financial, which originated from
the
subprime crisis, and which has ramifications throughout
the financial system. We don’t know how far. I don’t
think we have yet seen the maximum extent of that impact. We could
not see anything resolved in terms of the ramifications involved
before 2009. So this crisis has nothing to do with the oil price,
or oil supply. And as a matter of fact it was the availability
of oil that had sustained the economic growth for the last few
years. Of course, it’s also the reverse that economic growth
has sustained demand for oil. But in no time was there a lack of
supply even in the worst situation. In the first quarter of 2003,
when Venezuela’s and Nigeria’s production was not there,
which was basically 4mn b/d, OPEC was there to supply. OPEC did
not use that opportunity to achieve price objectives, and was looking
more for price stability. So if you are talking about how OPEC
can alleviate this issue, I think it has already done more than
was required.
In
the last meeting we increased supply by 500,000 b/d, that supply
appeared
in December, and it is continuing. But that did not really
have an impact on oil prices, for the simple reason that there
are other parameters that are very, very powerful which basically
are the result of the policy of lowering interest rates, which
helps maybe the balance of payments, but does not help the value
of the dollar, with respect to the other currencies. Consequently
the lowering of the value of the dollar has an impact on oil prices.
It’s directly related. So as the dollar is devalued with
respect to the euro and other currencies, the oil price increases.
And you have still the uncertainties in the [global] economy, and
also the fact that in 2Q you will have lower demand. So if you
put all this together, and especially the fact that the stock level
is at a good level, under the average of the last five years, demand
in terms of the short term seem to be lower, 2Q, and in the long
term if you take into account the impact of the financial crisis,
and the possibility of a recession that is estimated at 40% now,
it could be higher, with the impact on the world scale, which I
doubt that it would have the full impact on the Chinese economy,
because the Chinese economy is not completely dependent on exports.
Q. Are there growing reasons now for a production cut?
A.
The arguments I was giving just now, do not militate in favor
of a production
increase. A production cut, I think is not on the
cards. Because, psychology first, a cut is not going to help the
world economy. Maybe we need to understand more what the world
economy is going through, and maybe roll over this decision we
have now and then in March make the appropriate decision. 2008
is probably the worst year we’ve had. Everything is hotchpotch.
There is no clear visibility on anything. In politics, in monetary
fiscal policy, in having clear ideas what supply is from non-OPEC.
They contribute 60%. We’re expecting them to come in with
their increases in production for the last few years. Maybe this
year they will come up with it. So that also militates in favor
of not doing anything, if 60% of that production is going to come
from non-OPEC. Why should you put more oil if in six months from
now you’re going to have to reduce again? That’s not
wise.
Q. Are you comfortable currently, with the prices round $90/B?
A.
We are not comfortable with $90/B. We would be more comfortable
if we had
a price that will remain stable for a long time. We don’t
have a range. I don’t think we could. We tried one time,
and we had to give up. It didn’t work. If you can come up
with some ideas about how the market could be stabilized – it’s
very difficult, because the market is not just fundamentals. If
you just had physical demand and physical supply, and you know
enough of economics to set those curves, you can say that’s
the market price. That’s not the way it works. The price
is not reflecting the intersection of these two curves, demand
and supply. It’s reflecting the geopolitics, it’s reflecting
the signal that we are getting, we as the OPEC and non-OPEC producers,
from the consuming nations when they say we’re going to go
to solar, we’re going to go to nuclear, we going to go to
bioethanol. What kind of signal are you giving? Well first you’re
giving in terms of supply, would actually invest to supply a market
which is disappearing? Secondly, when you say you’re going
go to those alternative energies – that means you’re
willing to pay for those alternative energies a much higher price
than what you are paying for crude oil. Bioethanol costs – much
higher than $100/B. What is the cost of solar, of nuclear? So the
long-term marginal cost gives a signal to the market. It’s
there, and it’s not $100. It’s much higher than that.
So this is the issue that I think you’re talking about – what
is the price? The price is set by the market, and the market is
there for the companies to invest in and develop Athabasca tar
sands
Q.
Threat of harsher sanctions against Iran – could that
bring a lot more price instability?
A.
I think it has in the past, and I think the market has integrated
that
already. So you’ve seen it already in the market price.
Probably the market is integrating about $30/B of insecurity, the
possibility of war and disruption.
Q.
The possibility of a quite serious war wouldn’t drive
up prices?
A.
I don’t know if the market believes that is going to
happen. Because that’s like firing a bullet in your foot.
Why would you put a sanction on somebody to make the situation
worse? In terms of supply, you know very well that if that happens
there would be a very big disruption, a big spike in price. Whether
the world economy is ready for that I’m not sure. The world
economy two years ago might have been strong enough to withstand
that. But with the conditions that we’re seeing today, with
the crisis even with the Fed rate decrease, yesterday we saw the
market responded well and then suddenly it went the other way.
So having another disruption, maybe it would get the recession
going. That’s all that’s needed.
Q. Do you think the fundamentals justify a price of around $60/B?
A.
We’ll I’m estimating that the premium is around
that right now, for all the issues I’m talking about. If
you take a premium of $30/B, you’re probably about right.
Q. How much concern is there in OPEC about the weakness of the
dollar and that you therefore need a higher price to translate
what you get in euros?
A.
That’s more a concern in some countries than others.
The ones that are exposed to the euro. Algeria is about 60% exposed
to the euro, because we buy about 60% of our imports in the euro
area. If the exchange rate goes in favor of the euro we’ll
be buying less, with the same revenues. So it’s a concern.
But it’s dealt with in the central bank. They have their
instruments to take into account. So it’s an issue for countries
that are highly exposed to the euro, there’s no doubt about
it, because that would feed inflation. You’ve seen lots of
Gulf countries that have very high inflation, that is due to the
weakness of the dollar. I think the major issue – there are
countries that are holding huge reserves in dollars. China, Japan,
Korea and the oil producing countries. So it’s a big problem.
Devaluation creates inflation. But if you want to rectify that
you need to diversify your reserves. But if you do that, it will
have an even bigger impact on dollar devaluation. So you’re
between a rock and a hard place. If you decouple, you’re
going to create a snowballing effect in the dollar’s value.
Q. You agreed at the OPEC heads of state summit in Saudi Arabia
in November to follow this discussion about the dollar. Has there
been any follow up/ interest in OPEC to discuss the matter?
A.
There was an interest. And I think there has to be a meeting
by the ministers
of finance of those OPEC countries which raised
the issue. I don’t know if it has been called on. But definitely
it was raised, and I think the agreement was that the ministers
of finance should initiate that meeting.
Q. Is there a growing need to put a quota on Iraq given that its
production is recuperating quite quickly in the face of weakening
global economics?
A. Right now there is no such issue.
Q. Rather than announce any formal cut, could you impose your
quotas more strictly?
A.
We also ask for better discipline. That’s the normal
rule – to ask OPEC countries to abide by their quotas. Some
are well below their quotas more than some others, so I think you
have to look at the global thing and if Iraq is going over, there’s
other countries that have not limited their quotas. I think globally
we are producing 500,000 b/d additional to that we agreed on.
Q.
There are arguments that OPEC could help the world economy, not
by raising
output but by stating its quotas more clearly, or
a price range that it’s more comfortable with. Why isn’t
it?
A.
I think the quotas are clear. What’s important for the
world to know is that we are there to respond to demand, if it
exists. And we have done that. And we have not gouged the world
economy like some people think. We could have done that in 2003,
when 4mn b/d was out of the market, and we just came and supplied
it. We are there to meet the demand. The price like I mentioned
before is not set by OPEC. It’s set by the market, whatever
it is. It’s not supply and demand, like I said. It’s
supply and demand, of course it is, the intersection of the curve.
The price reflects other considerations, which have to do with
geopolitics, with speculation, it has to do with those other signals
you get from bioethanol, renewables and nuclear, from the lack
of capacity in the refining sector. All those aspects are reflected
in the price and I don’t think OPEC neither wants nor has
the ability to really control prices. We tried to have a range,
and it didn’t work.
Q.
Do you think all countries share your view that it wouldn’t
help the world economy to increase production, including Gulf countries?
A. Some people are more sensitive, they have their hearts closer
to.... some others are less sensitive to those issues, so there
will be some debate on that. And of course there are political
pressures. Some of them are implicit, some of them are explicit.
Q. Since the fourth quarter 2006 you have supplied the market
with less than the market needed. In a way you have been responsible
for the price increase.
A.
If you look at the stocks. Withdrawal from the stocks was because
there was
a tremendous need from the refiners. Stocks were much
lower than the average five years. Now we’re going to see
replenishment of the stocks, once the refineries have completed
their [seasonal maintenance] operations. And we’ve already
seen the replenishment of stocks, because those refineries are
operating at less than full capacity. If you withdraw more, of
course the stocks are going to be lower. Then if you lower the
rate of refinery operations and withdraw less, that means the stocks
will go up. Because we’re still supplying the same amount
of oil. We’re not trying to micro-manage the market. OPEC
cannot micro-manage the market. We can’t every week say ‘Oh
look, the stocks are less, so let’s pump more’. We
can’t do that. So we do that in view of the evaluation during
the meeting. That’s as much as we can do. We said we would
have this ‘extraordinary’ meeting because we know there’s
going to be lots of volatility and upheaval in the market, so we
need to make sure if there is a need then we will meet it. I don’t
think there is a need there.
Q. When you look at the supply curve looking ahead to 2012-15,
do you see a supply crunch as the IEA says? Will there be an inability
to meet demand in the longer term?
A.
Look, I think the market functions extremely well. If you have
low prices
like we did have at one time, that means the market
is going to balance that, which means there will not be extra production
put into the market, because you would be a fool to put extra production
in the market. I’m not talking about OPEC only. If you look
at when we had $10/B, how much money has been put into exploration,
and how much training has been done: nothing. In fact that’s
why we have the problems now. All the people who were trained in
the 1990s are going. Lots of people not coming to our sector because
they feel it is polluting, and that’s also helped by the
issue among consuming nations of the need to shift away from oil
and gas because it’s polluting. Lots of the young people
don’t want to come to our sector. So now we have a sector
that needs investment and human resources. This is the big problem
we have now, not just in Algeria but all over the world – we
are competing for human resources.
Editor's note: This
article was first publish by Middle East
Economic Survey-
MEES, in MEES,VOL. LI, No 5, 4-February-2008.
Petroleumworld reprint this article in the interest of our readers.
