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The great recession is over, says Opec secretary general

The world's economy has nothing to fear from $100/b oil, says Opec secretary general Abdalla El-Badri

OIL PRICES at $100 a barrel will not affect economic growth and pose no threat to the global recovery, according to Opec. "We are entering into a new era of growth," the group's secretary general says. "The great recession is over."

It's a message that will cause disquiet in some Western consumer countries, where the economic recovery remains tepid, confidence is low and worries about a double-dip recession persist. When Egypt's troubles pushed Brent crude above $100/b last month, the price tag prompted a rash of headlines and warnings from commentators of more doom.

But Abdalla El-Badri, in an interview with Petroleum Economist, swept aside those concerns and insisted that if Western finance ministers are worried about oil-price inflation hitting their economies they should do something about it themselves.

Through fuel levies, the countries of the G7 make more money from a barrel of Opec's crude than its producers do, El-Badri said. "I don't see how the [oil] price will affect countries. You are increasing taxes because you think the price will go up. Why do all the EU countries increase prices? That means that $100/b doesn't affect the growth."

It's an argument that cuts to the heart of the debate between producers and consumers. Fatih Birol, the International Energy Agency's chief economist, said last month that oil prices had entered a "dangerous zone" for the world's economy. Oil-import bills in the OECD in 2010 had soared by $200bn, to $0.79 trillion – equivalent to about 0.5% of the OECD's GDP, he said. The impact was comparable with that of the price spike during 2008 and Opec ought to push more oil onto the market – or see its consumers suffer.

But if oil prices – and import costs – are soaring, Opec is not to blame, said El-Badri. Opec's output has crept up to 29.3m barrels a day (b/d), he said, with "plus-6m b/d" of spare capacity in hand. (The IEA estimates that it stands at 5.42m b/d.) Stocks giving 60 days of forward cover remain "very high", or about six days above the target. The market is not short of oil and Opec sees no reason to act. Its next meeting is scheduled for June.

And another scapegoat for Western critics lives closer to home. Speculation, not the fundamentals of supply and demand, are again "dictating" the market, El-Badri said. These "financial players" – hedge funds and investment banks – trade 2bn b/d of virtual oil, he claimed, although the physical market for crude was just 67m b/d.

That, at least, is an argument on which Opec and Western governments can agree. Since the spike of 2008, both the EU and US have said they would tackle such speculation – endorsing Opec's argument that it influences prices. Despite opposition from some market players, including oil companies, the US' Commodities and Futures Trading Commission is moving ahead with plans to limit the positions large investors can hold in the oil market. New rules should be proposed in the coming months.

If that takes some heat out of the market, Opec won't be disappointed. Hundred-dollar oil may not hinder the world's economy, but it's not a price that has any justification, either, says El-Badri. Opec won't start pumping more oil when stocks remain so ample.

And the group has considerable breathing space. El-Badri said at the end of January that if forward cover dipped to 53 days, Opec would increase output. But that is some way off. Ali al-Naimi, oil minister of Saudi Arabia, the group's biggest exporter, said last month that Opec "cannot put oil in markets that don't need it".

That's not to say Opec is comfortable with triple-digit oil. Al-Naimi claimed his preferred range remains $70-80/b. Many Western economists agree such a level would be manageable for consumers. And even at $70/b, said El-Badri, $155bn worth of new projects the group's members plan to bring on stream by 2014 are viable.

El-Badri said that upstream campaign will add 12m b/d of gross capacity, although Opec hasn't disclosed which countries will see most investment or the greatest capacity rise. Iraq's huge projects will eat up some of that cash. El-Badri says the country, with ambitions to lift output to more than 12m b/d within a decade, will eventually be "accommodated" back into the group as its output rises. But this is not imminent – potentially in "three or four years". Iraq's quota was suspended in 1990.

Extra Opec capacity may be necessary. The world economy is now travelling down "two tracks", said El-Badri. Sluggish economic growth in the West will not offset fast economic expansion in Asia, meaning oil demand will also rise. Opec reckons global oil consumption, led by these booming economies, grew by 1.6m b/d last year and will rise by another 1.2m b/d, to 87.3m b/d this year. China's demand alone will grow by 5%, to 9.3m b/d – and non-OECD countries will meet 85% of demand growth next year. (The IEA is even more bullish, saying global oil demand will hit 89.1m b/d next year, or growth of 1.4m b/d over 2010.)

There are risks to this outlook. Inflation worries in China have already prompted two interest-rate rises and government-led efforts to dampen growth. But, points out one Opec watcher, these threats are well known to Opec and its big exporters. "The Saudis read every single piece of research on the Chinese economy," he says. "They know the risks. Their immediate picture is one of rising demand."

That is something the rest of world, and especially the West, must learn to live with. Oil-production costs, which soared in the bull-run of 2008, are also on the rise again, said El-Badri. And the dollar's depreciation has also shifted things. "The $70/b of three or four years ago is not the $70/b of now," he says. Money printing and currency devaluation in the West have boosted the oil price, too, and Opec can't be blamed for that strategy, either.

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