Fair oil price would be twice as high, Opec says

By Sean O'Grady, Economics Editor, in Davos
Friday, 30 January 2009

A "fair price" for oil is between $60 and $80 a barrel, the secretary general of Opec, Abdullah al-Badri, told participants at the World Economic Forum yesterday, up to twice as high as the current price in the market.
Mr Badri warned he believed that the current price of oil, around the $40 mark, was insufficient to provide an acceptable income for Opec member states, or high enough to fund the investment needed to raise capacity in time for the next economic upswing.

The price of a barrel of oil has fallen from a peak of almost $150 last summer to below $40 in recent weeks as demand for oil has fallen sharply in line with the global economic downturn. The oil producers' group, said Mr Badri, was prepared to act to reduce supply further if necessary; having decided to cut output in September and October, Opec oil production will be 4.2 million barrels a day lower by the end of this month, and further cuts in supply would act as an inflationary pressure on the market price.

The cartel, which accounts for roughly 35 per cent of world oil production and two-thirds of proven reserves, is next due to meet formally in March in Vienna, Austria. Mr Badri said that if Opec was still suffering from what he described as a "destruction of demand" in March, then members of the group "will not hesitate to take oil out of the market".

He said he was "not very happy" with oil at $40 "or even $50" per barrel. "Even with $50 we cannot have a decent income for our members," Mr Badri added.

However, while Opec member states have been warning for some months that the current market conditions cannot continue indefinitely, higher oil prices would be a blow to much of the world. As the global economy enters what the International Monetary Fund said on Wednesday would be the worst recession since the Second World War, cheaper oil is one of the few bright spots. Any push by Opec for higher prices through restricting supply will suck even more spending power out of the advanced and emerging economies, and may hit developing nations especially hard.

Nevertheless, the Opec secretary general's declaration of a "reasonable price range" was endorsed yesterday by BP's chief executive, Tony Hayward, who estimated that a price of between $60 to $80 a barrel was needed to ensure adequate investment to meet growing oil demand by Opec countries. Mr Hayward also said that only this level of price would meet the cost of producing the marginal 3 million to 5 million barrels a day of world supply from sources such as ultra-deep water wells, Angola, Brazil and Canada's oil sands.

The BP boss said, however, that price levels higher than $100 tended to adversely affect consumer behaviour.

Pierre Gadonneix, chairman and chief executive of Electricité de France (EDF), also agreed that $60 to $80 would be compatible with a competitive nuclear power sector, which he favoured.

Indeed the "spirit of Davos" seemed to overwhelm all the energy session panel members in their rush to agree with the $60 to $80 proposal: other panel members, including Mukesh Ambani, chairman of the Indian giant Reliance Industries, which has interests in natural gas, and the President of oil-producing Azerbaijan, Ilham Aliyev, were also happy to back the Opec line.

Mr Badri repeated the Opec claim that the spike in the price of oil to an all-time high of $147 last year was artificially created by speculative traders rather than genuinely reflecting demand and supply. He also hinted at the idea that the world's major oil producers and consumers should agree the oil price and make oil a much less traded commodity.