Oil at $80 can restart global economy: Tim Clark

At a time when global airlines industry is fighting its wildest card — the oil price, Emirates’ President, Tim Clark, says that oil prices should be brought down to $80 a barrel in order to help global economy recover.

“Supply and demand says you need oil price to be at $80 a barrel to get things going again. So $80 is where oil should sit. And mark my words, you get it down to $80, keep it at $80, and then you see the global economy start to move again,” Clark told Gulf News in an interview in Beijing last week on the sidelines of an industry event.

Having averaged nearly $120 a barrel in the first quarter of this year, Brent crude oil has slipped as low as $95 a barrel this month, the lowest level since January 2011 on signs the global economy is slowing.

“We have America self-sufficient in oil now, we have multiple exploration in Shell deposits now which are chain transforming the way oil is bored and extracted. You have new finds in Mozambique and Uganda. So there is plenty, and yet the price stays up there… hello, what’s going on here?,” asks Clark with raised eyebrows.
Many global airlines, including Emirates, have had to pay a hefty price with fuel bill shaving a chunk of their profits in financial year 2011-2012. Emirates said in May its net profit fell 72 per cent for its last fiscal year after the Dubai-based airline took a massive $1.6 billion hit from high fuel costs.

“It [oil] should never have been a $120-$130 [range]. That was outrageous. It was almost criminal,” said Clark vehemently. Further emphasising his point, he said that industry conditions demand oil prices be down.
“With the global inventories falling, with demand falling — particularly in the European and American markets, aviation contracting, multiple bankruptcy and failures in the civil aviation industry, very new entrants, very little increase in production… come on, how can you justify fuel being up there? And there are some other forces at work pushing it up. There’s no reason for that,” he said.

Fuel hedging

Emirates, meanwhile, has no plans to restore its fuel hedging programme anytime soon even as oil prices have softened somewhat, according to Clark. “Let’s see how far they [oil prices] go down. The good number would be $80 [a barrel]. That’s where it should be. That’s where the global economy needs it to be — not just for the aviation sector but everywhere else,” he told Gulf News while advocating the $80 mark for oil, when quizzed on the airline’s current position on hedging at the moment.

Asked if it made viable sense for the airline to start hedging again, Clark said: “I am a little bit of a sceptic. Why? Because in 2008-09, the airline industry got severely damaged by the hedge programme that they all entered into. And when the oil price went down to $30 from a $120 in May 2008, the mark to market implications were devastating.”

Displaying little confidence in the hovering oil prices, he said that the volatility in the markets is so great that it’s “difficult to know” when to go in. “When there is no volatility, you don’t need to go in. And you’ve got to be pretty smart — nobody is going to be able to tell me or you what it’s [the oil price] likely to be in the future,” he pointed out.

So would you only reconsider hedging once the oil price is down to $80? “I guarantee you this — if the oil price comes down to $80, the forward curve would be a $160 a barrel. Watch! You could never win with these people… never. This is a casino you’re getting involved in. How many people come out of casinos as winners big time? Not many. And that’s what you’re doing. So if you want to go in at $80 and I could buy forward 50 per cent of the 2013, 2014, 2015 production at $90 a barrel, then maybe you’d do it,” said Clark.

“Anyways, if we’re ever to go back into using simplisitic instruments — what a lot of people did in the early days is that they started to dabble in complex gambling instruments — however complex they are, the more complicated the situation of managing the hedge portfolio, the higher the risk,” he summed up.

By Shweta Jain Senior Reporter, Jun 19 2012