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A year ago, the price of oil was less than $20 per barrel. At the start of 2003, it was more than $30, a two-year high, fueled by the strike in Venezuela and worries over how possible U.S. military action in Iraq will affect the flow of oil from the Middle East. Just how much should we worry about higher oil prices and their potential impact on the economic recovery?

There's plenty of reason for concern. The last five recessions were all preceded by substantial hikes in oil prices. Indeed, the tripling in the cost of oil during 1999 and 2000, from $12 per barrel to $36, may well have received short shrift for its role in provoking the 2001 downturn. Now, just as the economy shows evidence of emerging from its autumn swoon, based on surprisingly strong December readings on manufacturing activity and car sales, the prospect of costlier energy once again looms large in the outlook.

Higher energy costs boost inflation, cut into economic growth, and significantly increase the cost of doing business in a broad range of industries--especially now, when passing along higher costs is virtually impossible for many companies strapped by a lack of pricing power. That means profits take it on the chin. Already-struggling airlines are especially sensitive to higher fuel costs, but other energy-intensive industries, such as steel, lumber, paper, chemicals, and plastics, are also vulnerable.

RULE OF THUMB. Still, outside of the worst-case scenarios for the Middle East in coming months, the U.S. should be able to weather $30 oil or even a temporary spike to a higher level, especially given the stimulus coming from the Bush Administration's new tax package. Moreover, market fundamentals and long-term trends imply that oil will be cheaper later this year.

Economists have a rule of thumb for gauging the macroeconomic impact of higher oil prices: Every $10 per barrel rise that lasts for a year cuts economic growth by about 0.5% and adds about 1% to inflation. By that rubric, even if oil averages $35 in 2003, up from an average of about $25 in 2002, the recovery should be little worse for wear.

But the real world doesn't always operate the way econometric models, whose projections are based on average historical trends, say it should. In reality, the response to higher oil prices is no clear-cut, straight-line relationship. That is, the impact of going from $15 oil to $25 oil appears to be a lot smaller than the jolt that occurs from, say, $35 to $45. Models tend to underestimate the adverse effects of oil spikes, and most fail to predict a recession, even at very high price levels.

CONSUMERS FEEL THE PINCH. Oil price spikes going back to the 1970s bear this out. So a sustained move from $25 to $45 oil would likely do more harm than just shave one percentage point from economic growth. It could even tip the economy into a recession.

Consumer spending, a factor crucial to the recovery, tends to suffer the brunt of the blow from higher oil prices. Another rule of thumb is that every $10 hike in oil increases household energy costs by about $50 billion. Unless consumers save less, which is unlikely now as households try to rebuild their savings amid economic and war uncertainties, that's $50 billion unavailable for spending on discretionary items, such as another sofa or a snazzy laptop. That drain could subtract up to 0.75% from the growth in real consumer spending over a year's time.

The impact on consumer prices is already starting to show up. Based on current and expected levels of prices for gasoline and heating oil, energy costs, which make up 6% of the consumer price index, will add about 0.1% to the rise in the December index and up to 0.3% to the January index. That means January inflation will be running at about 3%, up from only 1.1% at the start of last year.

VENEZUELAN TURMOIL. It's important to note, however, that core inflation, which omits energy and food, is actually falling, due mainly to a sharp slowdown in housing costs, which account for more than a third of the core CPI. Costlier energy is being partly offset by cheaper mortgage payments, reflecting multi-decade lows in mortgage rates.

Still, even with no further rise in energy costs from the January level, the growth in first-quarter consumer spending over the fourth quarter would be depressed by about 0.5%, at an annual rate. Beyond that, though, the outlook depends on how events in Venezuela and the Middle East will play out.

The six-week-old strike in Venezuela, which had been supplying 10% of U.S. crude, has cut the country's output to only 20% of its 3 million barrels-per-day capacity. And analysts doubt that President Hugo Chavez can keep his pledge to restore full capacity by mid-February. Partly because of the strike, U.S. crude inventories are 11% below their year-ago level, according to the American Petroleum Institute.

SHADOW OF WAR. For now, at least, the price effect of Venezuela's reduced production is mitigated by the desire of other OPEC members to keep the global flow of oil on an even keel. OPEC members have an informal pact to keep prices in the $22-to-$28 range, a level that OPEC believes will generate a steady flow of oil revenues without damaging global growth, which would depress receipts. To that end, OPEC has agreed to increase output by 1 million to 2 million barrels per day to make up for Venezuela's shortfall, and prices are off their recent highs.

Yet Iraq still casts the biggest shadow on the outlook. Analysts offer only general scenarios. One: An uneasy peace with Saddam Hussein relieves war worries and allows oil prices to head back into OPEC's target range. Two: A quick war ousts Saddam, resulting in a sharp price drop, with obvious economic pluses. Even this best possible case, however, may not yield full benefits immediately, since huge investments will be needed to fully resurrect Iraq's oil infrastructure.

But it is fear that the war will go badly and the flow of oil will be disrupted that is keeping prices up right now. On this one, who knows? One extreme-case scenario: A nuclear device contaminates key oil fields for years, sending prices over $100 per barrel.

REASONS FOR HOPE. Barring that, the best bet is that oil-market forces will reassert themselves later this year, allowing prices to fall. First, OPEC has learned the value of stable prices. Second, inflation expectations are low, meaning that a temporary oil spike will not fuel a generalized pickup in inflation. And three, higher oil prices have much less impact on the economy than they did in earlier years. Because the U.S. is more energy-efficient, it now derives twice as much gross domestic product from the same amount of energy used in the 1970s.

Nevertheless, oil is still a crucial factor in the economic outlook. So in the coming months, fill 'er up, lock in the best available contract for winter fuel oil -- and keep your fingers crossed

www.forbes.com Reuters, 01.13.03, 11:30 AM ET By Alexander Manda

LONDON, Jan 13 (Reuters) - Substantial new issuance by emerging market borrowers aiming to raise funds ahead of a threatened war in Iraq could weigh on bond prices in coming weeks, choking off a new year rally, analysts say. Last week, Chile, Mexico, Turkey and the Philippines all brought new bonds, raising more than $4 billion between them in a few days. Emerging issuers are bringing forward issuance plans as any conflict over Iraq would raise risk aversion and effectively close capital markets for lower-rated borrowers.

Emerging market debt has done well so far this year, up 1.7 percent on average, with investors chasing yields in a segment that returned 13 percent last year.

But analysts say the unusually heavy and early supply of bonds may undo these gains. "At some point the market should at least pause. I don't see the market having a great performance... It may tumble a bit," said Vincent Megard, emerging bond fund manager at AXA Investment Managers in Paris.

Fears of conflict over Iraq, which the U.S. suspects of developing nuclear and biological weapons in violation of UN resolutions, have been hanging over financial markets for weeks.

"Issuance has been crammed in to the beginning of the year, because people are expecting the market to be closed out to them for a period," said Tim Ash, emerging bond strategist at Bear Stearns in London. "For instance, Turkey had to issue, and had one eye on Iraq," he said. War would send risk aversion and oil prices soaring, locking countries like Turkey, Iraq's northern neighbour and a key U.S. ally, out of international capital markets. That would be a serious problem for Ankara which promised the IMF it would borrow $3.5 billion by the end of 2003.

Turkey, which issued a $750 million 10-year bond yielding 11.25 percent, might have wished to wait for its bond yields to fall back to levels reached in December, at the height of optimism about the country's bid to join the European Union.

Turkey said on Monday it planned to raise at least $4 billion in privatisation revenue this year but, if it had to return to the bond market, analysts reckon its terms might not be as favourable as last week.

"If Turkey comes with another issue now there will be some pressure. The latest issue initially traded down around half a point, and now people are saying that the leads are supporting the deal. It is not a market that can take a lot," said Borislav Vladimirov, emerging debt strategist UBS Warburg in London.

MARKET PAUSE SEEN According to the industry benchmark, JPMorgan's Emerging Market Bond Index plus <11EMJ>, emerging debt has risen 1.7 percent, or 47 percent annualised, in the first 13 days of the year. Low U.S. interest rates have encouraged investors to take on more risky, high-yielding assets.

But this may not last long, said Peter West, senior economist at Poalim Asset Management in London.

"The increase in risk appetite could be reversed by a long conflict with Iraq, or if something were to go terribly wrong in Brazil. Venezuela is also looming as a potential problem," he added. Brazil elected a new president in October, who took power at the start of this year. The EMBI+ priced Brazil's risk more than 4.5 percentage points higher at the beginning of January than a year earlier, because the new president's team is left-wing and untested.

Venezuela is gripped by a general strike, now in its sixth week, which has brought its oil industry, the provider of 90 percent of its export revenues, to a standstill.

NET REPAYERS IN 2003 Overall though, analysts reckon that with cash raining into funds managers' coffers from redemptions, demand for emerging debt will outstrip bond supply through 2003, meaning prices should resume their upward path.

Also limiting supply, Russia, the second largest element in the JPMorgan index, has been a net creditor since its financial crisis in August 1998, and may not need to do an international bond this year.

Mexico, which launched a $2 billion bond last week, is not expected to come back to market this year.

"The market may well be net receiving money at the end of this year," said UBSW's Vladimirov.

www.miami.com Posted on Mon, Jan. 13, 2003

CARACAS - (AP) -- President Hugo Chavez threatened to revoke the broadcasting licenses of Venezuela's main TV and radio stations, accusing them of supporting opposition efforts to overthrow him through a 6-week-old strike.

Chavez said Sunday the stations were abusing their power by constantly broadcasting opposition advertisements promoting the strike, which has dried up oil revenue in the world's No. 5 oil exporter but hasn't rattled the president's resolve to stay in power.

Venezuela's main television stations have not broadcast any commercials during the strike except the opposition ads. Media owners say they adopted that stance because Chavez incites his supporters to attack reporters.

''They are worse than an atomic bomb,'' Chavez said during his weekly radio and television show Sunday. ``If they continue to use their licenses to try to break the country or oust the government, I would be obligated to revoke it.''

He spoke as tens of thousands of his opponents marched on Los Proceres park outside the Fort Tiuna military base in Caracas, seeking military support for the strike. Troops lobbed tear gas at the protesters but they quickly regrouped, shouting ''cowards'' at hundreds of soldiers facing them with armored personnel carriers.

Troops also kept back dozens of Chavez supporters demonstrating nearby.

The first marchers to arrive at Los Proceres park stomped down barbed wire blocking the entrance but they did not try to break security lines.

Hector Castillo, a photographer for El Mundo newspapers, was injured by rubber bullets that some soldiers fired into the air, Caracas Fire Chief Rodolfo Briceno said.

Eighteen other people were treated for tear-gas asphyxiation, he said.

The park is one of eight security zones in Caracas decreed by Chavez. Protests are banned in those areas unless authorized by the Defense Ministry.

The military -- purged of dissidents after a brief April coup -- has supported Chavez during the strike, with troops seizing oil tankers, commandeering gasoline trucks and locking striking workers out of oil installations.

Top commanders have professed their loyalty to the government.

In Colombia, Venezuela's foreign minister, Roy Chaderton, dismissed the possibility that Venezuela was heading toward civil war.

''To have a civil war, two [sides] are needed, and the government doesn't want that,'' Chaderton said. ``We are not preparing ourselves for civil war but to preserve peace and reconciliation.''

Venezuela's largest labor confederation, business chamber and opposition parties began the strike Dec. 2 to demand that Chavez resign or call early elections if he loses a nonbinding referendum on his rule.

The National Elections Council scheduled the referendum for Feb. 2 after accepting an opposition petition signed by two million people.

Chavez says the vote would be unconstitutional, and his supporters have challenged it in the Supreme Court.

He was elected in 1998 and reelected in 2000, and his term ends in 2007. Venezuela's constitution allows a recall referendum halfway through a president's term -- August, in Chavez's case.

Chaderton said the government would consider providing funds for the vote if the Supreme Court upheld it.

''An opposition that contributes . . . to strangling the country's economy and calls for tax evasion . . . is demanding funds for a vote. How curious,'' he said. ``But at an opportune time, after the judicial institutions make their decision, we will decide.''

www.lancastereaglegazette.com By HOLLIE SAUNDERS The Eagle-Gazette Staff

The up and down prices of gasoline at the pumps may be a way of preparing people for a possible sharper increase by spring.

According to the Ohio Auto Club, the current Ohio price average is currently $1.40, which is 12 cents higher than a month ago, and 24 cents more than a year ago, even though it is 6 cents less than the national average.

The national average is currently $1.46, which is 8 cents higher than a month ago and 34 cents more than a year ago.

Gasoline prices nationwide are expected to average $1.54 a gallon by mid-spring. Summer prices are likely to be even higher as fuel demand historically increases in June with the coming of the summer driving season.

The Ohio Auto Club cited reasons for the current prices as because of declining inventories of crude oil in the United States; and a recent increase in world oil prices to as much as $32 per barrel.

The cost of regular gasoline at Speedway on North Memorial Drive, Lancaster, dropped on Friday from $1.47 to $1.45.

"It's like a roller coaster, constantly going up and down," Speedway employee Pam Lynch said. "People accept it. You need it, so you have to pay whatever it is."

Adriana Escalante of Athens said she tries to cope with the increasing cost of gas.

"I avoid driving as much as possible since it's so expensive," Escalante said. "There's not a lot of money and good jobs are scarce, so you do the best you can."

Escalante is a member of the Ohio National Guards. She said she doesn't really see how foreign affairs affects the current price of gasoline.

"I think the government sets the standard for gas prices based on where the economy is at," she said.

Evan Cansler of Mansfield is a heavy equipment operator.

"The type of work I do, I have to drive, and I have to buy gas. I have to roll along with what comes along. I can't worry about what the gas prices are or will be," Cansler said. "As far why the prices are going up, it goes deeper than a lot of people realize."

At Dave and Mike's Marathon, 159 N. Memorial Drive, Lancaster, price for regular gas also dropped on Friday -- from $1.53 to $1.48.

Tom Winezer of Lancaster, an employee at Marathon's said the prices have not affected business.

"People complain a lot, but they still pay," Winezer said. "There's not a lot you can do about it."

Employees at Meijer's Gas Station, 2900 Columbus-Lancaster Road N.W. said their gas came down a few cents to $1.45 on Friday.

OPEC members, meeting in Vienna Austria, agreed Sunday to boost the cartel's oil production target by 6.5 percent to stabilize a world market jittery over a crisis in Venezuela and the possibility of war in Iraq.

The increase of 1.5 million barrels a day -- to 24.5 million barrels -- would take effect Feb. 1, OPEC President Abdullah bin Hamad Al Attiyah told a news conference at the group's headquarters in Vienna.

Al Attiyah confirmed that the Organization of Petroleum Exporting Countries wants to keep prices of its benchmark blend of crudes at $22-$28 per barrel. Friday prices hovered around $30.

Whie House officials, have said repeatedly in recent weeks that no consideration is being given at this time to use any of the 592 million barrels of oil kept in the emergency reserve to ease supply pressures.

(The Ohio Auto Club and the Associated Press contributed to this story)

www.businessweek.com JANUARY 13, 2003 02:22 PM MARKET SNAPSHOT

Corporate news took centerstage and put a damper on stocks. In the spotlight: AOL chairman Steve Case resigns

Stocks edged modestly higher around 2 p.m. Monday afternoon as investors weighed doubts about fourth-quarter earnings and digested news from AOL Time Warner (AOL ) that Chairman Steve Case will resign in May.

The major indexes hve moved in a narrow range since noon. The Dow Jones industrial average gained 31.74 points, or 0.36%, to 8,816.63. The broader Standard and Poor's 500-stock index ticked up 1.75 points to 929.32. And the Nasdaq composite index added 2.46 points, or 0.17%, to 1,450.18. Last week, the Dow gained 1.5%, while the tech-laden Nasdaq jumped 3.5%.

Topping company headlines, AOL says its much-maligned chairman Steve Case, the architect of the company's acquisition of Time Warner in 2001, will step down in May. Now all the chief architects of the deal are gone, with former Time Warner top exec Richard Parsons now running the show as CEO and soon-to-be chairman.

Meanwhile, defense giant Raytheon (RTN ), sanctioned in November for alleged violation of disclosure rules, said the U.S. Securities and Exchange Commission has begun a separate accounting investigation into the company's business that makes Beech Jet and King Air commercial aircraft.

Dell Computer (DELL ) lost ground after J.P. Morgan downgraded the stock to neutral from overweight.

Fourth-quarter earnings season picks up speed this week. Troubled hospital chain Tenet Healthcare (THC ) shares rose after the company reported fiscal second-quarter earnings Monday of 72 cents per share, vs. 56 cents a year ago. Revenue rose 11.3%. Looking ahead, S&P says Tenet's EPS comparions should turn negative on the adoption of a new Medicare "outlier" payment policy as of Jan. 1. Tenet has been criticized, and is under investigation, for the way it used Medicare reimbursements to boost revenue.

Duke Energy (DUK ) shares skidded after the utility company said 2002 ongoing EPS fell about 10 cents below the previously indicated range of $1.95 to $2.05, due to weakness in the economy and power prices and trading. Merrill Lynch downgraded the stock to sell from neutral.

Tech outfits Intel (INTC ) and Teradyne (TER ) will report quarterly results Tuesday, while Yahoo! (YHOO ) and Apple Computer (AAPL ) are due Wednesday.

On Thursday, IBM (IBM ), Microsoft (MSFT ), Sun Microsystems (SUNW ), General Motors (GM), and eBay (EBAY ) all report results. Conglomerate General Electric (GE ) will release fourth-quarter profits on Friday.

This week, global tensions will continue to weigh on the markets. North Korea said Friday it will withdraw from a global treaty to prevent the spread of atomic weapons, but added it would not develop nuclear weapons. The U.S. condemned the country's decision to quit the treaty but is "willing to talk" to North Korea, Special Envoy James Kelly says.

The prospect of war with Iraq dimmed somewhat Friday as U.N. arms inspectors criticized Iraq's lack of cooperation but added that they found no "smoking guns" to indicate that programs to produce weapons of mass destruction were restarted. However, the U.S. military continues to build up forces in the region.

In the meantime, the oil workers' strike in Venezuela is creating a dire economic situation for the country as opposition labor leaders step up pressure on President Hugo Chavez to step down. Now many workers from other areas of the economy are walking off the job, according to wire-service reports.

In Vienna, OPEC ministers voted to boost production of oil by 1.5 billion barrels per day to try to keep the price from rising above its target of $28 per barrel. Crude oil prices rose to nearly $32 per barrel on Monday.

Treasury Market U.S. Treasury prices were mostly higher in price Monday as equities weakened. Traders were also keeping an eye on the supply situation as corporations announce offerings.

World Markets European stocks were mixed. In London, the FTSE index finished down 25.80 points, or 0.65%, to 3,948.30. In company news, J Sainsbury Plc, Britain's second-largest supermarket chain, plans to make a hostile 4.4 billion-pound ($7 billion) offer for Safeway Plc to thwart a bid from smaller rival William Morrison Supermarkets Plc. Paris' CAC-40 index added 9.69 points, or 0.31%, to 3,169.82. In Frankfurt, the DAX index climbed 28.93 points, or 0.95%, to 3,066.26, following a report that German industrial production rose a surprising 2.5% in December, the largest increase in two years.

In Asia, stocks finished higher. Hong Kong's benchmark Hang Seng added 112.58 points, or 0.48%, to 9,721.50. Japanese markets were closed for a holiday. On Friday, the Nikkei 225 index closed at 8,470.45.

Today's Headlines About 7,000 Marines from Camp Lejeune and a number of fighter pilots from Seymour Johnson Air Force Base will leave for the Persian Gulf region over the next few days as tension with Iraq continues to grow, officials said: AP.

North Korea withdrew from a global treaty that bars it from making nuclear weapons, but said it was willing to talk to Washington to end an escalating dispute over its nuclear ambitions: AP.

The Bush administration plans an initiative to form a group of nations to help end a strike in Venezuela that has crippled oil exports from the major oil supplier to the United States: Washington Post.