www.atimes.com

In the next few weeks, the struggling global economy may be put to the test if Washington chooses to invade Iraq. There are many economic risks involved in bombing Baghdad, the most important being a spike in oil prices. With oil prices already over US$30 a barrel, increased pressure has been put on the global economy as more money is spent on importing oil.

Should the United States attack Iraq, there is a real possibility that Middle East oil shipments will be disrupted. US oil inventories are already running low due to the nearly two-month long Petroleos de Venezuela oil strike in Venezuela. While it takes only one week for Venezuelan oil exports to reach the United States, it takes four to five weeks for them to arrive from the Middle East.

During an American attack on Iraq, an errant bomb could destroy or interfere with oil operations, halting Iraq's 1-2 million barrels per day (bpd) in exports. Compounding the American threat, Iraqi leader Saddam Hussein could opt to damage his own oilfields by ordering troops to light them on fire, as was done to Kuwait in 1991.

In order to prevent a rise in oil prices, any reduction in Iraqi oil exports will need to be compensated by an increase in oil exports from OPEC nations and non-OPEC nations alike. However, most OPEC nations are already producing at capacity, such as Indonesia and Qatar; the biggest oil producers outside of OPEC - Russia, Norway and Mexico - cannot increase their output since their pumps are already running at full capacity.

This likely scenario has worried economists; it could result in oil prices as high as $40 a barrel, possibly causing extensive damage to the global economy. However, the Bush administration believes that the end result of the invasion will be economic growth rather than economic recession. The fate of the economy will rest on how fast the United States can get oil flowing again after the war; once oil production has stabilized again, the United States will likely be able to increase capacity by updating Iraq's oil infrastructure.

While before the Gulf War, Iraq was exporting 3.5 million barrels per day, it is predicted that Iraq may be able to increase production up to 5 million bpd with US assistance. Larry Lindsey, former top economic adviser to President George W Bush, supported this prediction in a statement last fall, "When there is regime change in Iraq, you could add three million to five million barrels [per day] of production to world supply. The successful prosecution of the war would be good for the economy." Indeed, this scenario would provide a boon to the global economy by increasing oil supply, dropping prices down to $15 to $20 a barrel.

But successful "regime change" might not be as easy as it seems. Iraq's oil infrastructure is already in bad shape and the prediction is that it will take five to 10 years for Iraqi oil output to reach such levels, if at all; in addition, there is no guarantee that the new Iraqi government will be willing to export such an inflated amount of oil. However, any new administration will most likely be installed and protected by US troops, thus reducing the government's actual independence from Washington.

The other most dangerous scenario is whether an invasion by Washington will heighten tensions in the Middle East in such a way that militant groups will attack oil interests when the US and global economy are most vulnerable. Indeed, if militants inside Saudi Arabia attempted to sabotage major oil facilities within the country, limiting exports, oil prices would skyrocket since other nations would not be able to supplement the amount of oil Saudi Arabia exports.

This would possibly send oil prices to over $50 a barrel, or cause prices to become static at $40 a barrel for many months. Indeed, Gary Hufbauer, of the Institute for International Economics, stated in the Baltimore Sun last October that a sustained rise in oil prices at a level of $45 or $50 a barrel could "turn [the economies of] the United States and Japan into a recession".

Should the two largest global economies - the United States and Japan - enter a recession, or even suffer further economic setback due to increased oil prices, it would greatly add to the misery of other suffering states and impact emerging market economies.

South American states, for instance, have had difficulty accessing global capital markets due to the economic uncertainty in Brazil - which has been flirting with economic disaster - and the recent economic meltdown of Argentina. Paraguay and Uruguay too have been hit by their neighbors' economic troubles, with the former suffering from low tax revenues and a stagnant economy. If the global economy were to deteriorate, it could create a scenario where Argentina would have to default on its debts to the International Monetary Fund. If Argentina were to default, and other countries soon followed, it would compromise the Fund's own financial position and economic assistance to needy economies would falter, further spiraling the world economy toward a grave future.

Along with South America, Asia will also be pushed into economic disaster should oil prices spike for a prolonged period. In addition to putting Japan into recession, South Korea, fraught with its own economic woes due to a rapid increase in real estate prices and unemployment, is also vulnerable. Seoul cannot rely on domestic spending to stimulate its economy due to ballooning household debt, a situation that increased oil prices would only exacerbate.

Singapore, too, is walking on the edge of economic demise. Narrowly missing a double-dip recession this last year, weak demand for the city-state's key electronics exports and manufactured goods led to further job losses, ballooning its unemployment level to a 15- year high.

Therefore, these concerns will be carefully weighed by the Bush administration as they consider whether or not to invade Iraq. With the global economy in such a precarious position, Washington will be hedging its bets; a war will either provide great economic gains, or colossal economic ruin.

The Power and Interest News Report (PINR) is an analysis-based publication that seeks to, as objectively as possible, provide insight into various conflicts, regions and points of interest around the globe. PINR approaches a subject based on the powers and interests involved, leaving the moral judgments to the reader. PINR seeks to inform rather than persuade. This report may be reproduced, reprinted or broadcast provided that any such reproduction identifies the original source, www.pinr.com. All comments should be directed to content@pinr.com.

www.upi.com From the Business & Economics Desk Published 1/29/2003 6:47 AM

Here is a look at more of Wednesday's top business stories:

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Arthritis drugs 'examined for cancer risk'

WASHINGTON, Jan. 29 (UPI) -- Federal regulators and medical experts are reportedly re-evaluating a new generation of arthritis drugs to find out if they increase the risk for cancer.

The review, according to marketwatch.com, a financial Web site, "could shake up the multibillion-dollar market for treating millions of rheumatoid arthritis patients." It said it has learned that the Food and Drug Administration has scheduled a review meeting for March 4-5.

It said FDA officials wouldn't say much about the meeting and refused to disclose what the review of drugs from Abbott Labs, Amgen and Johnson & Johnson would cover. But analysts -- and Amgen's head of research and development, who spoke about the issue in the company's fourth-quarter conference call -- said the agency "is looking at a possible link between the rheumatoid arthritis therapies and a form of cancer called lymphoma."

Agency officials, the site said, "declined to talk about what data they have regarding a potential link between the arthritis drugs and cancer."

The drugs involved are Amgen's product, Enbrel: J&J's drug, Remicade, and Abbott's medication, Humira. If they're found to pose equal risks, according to marketwatch.com, sales might not be affected even if the FDA orders strong lymphoma warnings on their labels. Pharmaceutical analysts said doctors would still prescribe them because there are no real alternative treatments for rheumatoid arthritis.

But things would be different if only some of the drugs carry a risk. "Any perceived safety advantage could shake up the balance of power in the high-stakes battle for rheumatoid arthritis patients. Enbrel and Remicade have been available since the late '90s, and both drugs hold significant market share," said the site. "The newest entrant is Humira, approved by the FDA on the last day of 2002."

It added: "All three drugs are considered crucial to the future profits of their makers."

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Kmart job cuts larger than indicated

DETROIT, Jan. 29 (UPI) -- Kmart Corp. has won approval from a court in Chicago to close more than 300 stores, and new documents in its bankruptcy case show that its financial collapse will cost 67,000 employees their jobs.

That's far more than the discount retailer had indicated until now, the Detroit Free Press reports Wednesday. Previously, the article says, Kmart said that 22,000 employees were pushed out of work when the company closed 283 stores shortly after declaring the largest retail bankruptcy in history a year ago.

In court records filed in Chicago, it said, Kmart indicated that as of Jan. 21, 32,000 workers had lost their jobs with the Troy, Mich.-based discounter in the first year of its bankruptcy. Another 35,000 will be unemployed when Kmart closes as many as 318 more stores by March.

U.S. Bankruptcy Judge Susan Pierson Sonderby approved Kmart's latest store closing plan on Tuesday, as well as a $2 billion revolving loan fund to provide the cash it needs as it seeks to emerge from bankruptcy by April 30, it said.

Going-out-of-business sales will begin Thursday as Kmart sells off as much as $1.8 billion in inventory at the 318 stores on its list, the Free Press said.

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Rural wireless operators to restructure

NEW YORK, Jan. 29 (UPI) -- Almost a dozen companies in the regional and rural wireless communications sector, which took on nearly $13 billion in debt when their revenues and valuations were much higher, might soon need fiscal restructuring.

Bankers say that this is likely for more than one reason -- but mainly because of rising leverage multiples as these companies' revenue plummets. Many of these firms' debt securities are trading at deep discounts -- 60 cents on the dollar or less, in some cases, according to Corporate Finance Week.

It said bankers cited "American Wireless, Centennial Communications, Dobson Communications, Leap Wireless, NTELOS, Rural Cellular Corp. and Sprint affiliates Airgate PCS, Alamosa PCS, Horizon, UbiquiTel and US Unwired as companies they expect to see involved in restructuring either out of court or following bankruptcy filings."

CFW said the 11 companies' revenue, by some measures, was down as much as 25 percent to 30 percent over the past two years.

CFW is published by the Institutional Investor group.

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Sell-off makes many oil shares attractive

NEW YORK, Jan. 29 (UPI) -- They got something of a respite on Tuesday, but up till then, big oil stocks were headed lower.

Shares in some of the so-called "supermajors" are trading at levels not seen since 1999, when oil was heading toward $10 a barrel. But now oil is $32 and natural gas is at nearly $5.50. The sell-off has been "straight out of the Big Portfolio Manager Playbook," the Wall Street Journal says Wednesday.

"Most investors think oil prices have nowhere to go but down." Most seem to think that problems in Venezuela will be resolved and that the United States will "go into Iraq on a Friday night, be in Baghdad on Monday and pumping Iraqi oil to the world by Tuesday," the newspaper says.

If that's what really happens, oil prices will fall, just like after the Gulf War, perhaps to the low 20s or below. And if world economies continue to stall, oil will plummet further. "Believing that scenario, you sell big oil now to be ahead of your peers. Except that the sell-off in the stocks already has taken place," the newspaper said.

The implication for investors: Big Oil stocks look attractive, such as BP or Royal Dutch Petroleum. Exxon Mobil is expensive. And "some of the mini-supermajors, such as ChevronTexaco, are worth a look, as is ConocoPhillips, which reports Wednesday."

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SEC finds 1,600 securities crimes since 1998

NEW YORK, Jan. 29 (UPI) -- Almost 1,600 brokers, dealers, investment advisers, bankers, attorneys and accountants were caught violating U.S. securities laws from 1998 to 2001, according to the Securities and Exchange Commission.

Most of the violations were committed by individuals associated with broker-dealers, but companies and investment advisers were also frequently involved, the Financial Times reports Wednesday.

It said that the most common offenses involved equity and debt offerings. Next came fraud against broker-dealer clients. There were also many cases of poor disclosure and market manipulation.

The SEC issued 782 permanent injunctions and 730 civil penalties that totaled $226 million. But only $78 million of that has so far been collected.

Disgorgement, under which "ill-gotten gains" are ordered to be returned, involved 673 cases and amounted to $799 million.

news.bbc.co.uk Wednesday, 29 January, 2003, 11:34 GMT

Managers at PDVSA have been key strike leaders

A total of more than 5,000 Venezuelan oil workers have been fired since they walked out eight weeks ago in an anti-government strike.

The official Venpres news agency quoted state oil company boss Ali Rodriguez as saying 5,111 employees had been dismissed for "dereliction" and that the number would rise.

Rodriguez warns there will be more sackings

The government had already announced about 3,000 job cuts since the strike began at state-owned Petroleos de Venezuela (PDVSA), which had about 40,000 employees.

Oil production almost ground to a halt in the world's fifth largest oil exporting country because of the strike, which helped send crude oil prices to two-year highs.

But striking oil workers have conceded that crude output has reached 1.05 million barrels a day, a third of pre-strike levels, after the military and foreign workers restarted production.

Strikers split

Venezuela's opposition has denied that the strike is faltering after businesses started to reopen, oil production increased and public infighting took place between strike leaders.

"This strike has not failed and will not fail," said Carlos Ortega, a union boss opposed to President Hugo Chavez.

Many blue-collar oil workers have returned to work, but PDVSA managers and skilled oil professionals say they will continue to strike until Mr Chavez resigns or holds elections and reinstates fired workers.

The split between the right-wing business and labour groups mirrors that during the coup last April when a similar alliance temporarily ousted the democratically elected Mr Chavez.

The then head of the business chamber Fedecameras, Pedro Carmona, seized power, dismissed parliament and the Supreme Court and excluded the labour co-conspirators from his cabinet.

Dubbed "Pedro the Brief" by the press, he was himself ousted after 48 hours and Mr Chavez returned to office.

business-times.asia1.com.sg By R SIVANITHY

SINGAPORE - ASKED why she was so wrong about equities in 2002, Goldman Sachs strategist Abby Joseph Cohen said in a Barron's Jan 13 report: 'I misjudged two things. One concerned the extent of the malfeasance on corporate data. Our valuation models are driven by earnings and cash flow. In 2002, we learned that previous earnings had been dramatically overstated.'

'Secondly, we did not properly gauge the extent of the geopolitical situation in Iraq, North Korea and Venezuela, which feeds into the risk premium for stocks.'

It appears that even today, analysts are still over-optimistic about earnings - particularly in the patchy technology sector - and have under-estimated the impact that war fears can have on weak, illiquid and jittery equity markets everywhere.

In the case of Wall Street, stocks may have risen slightly on Tuesday, but a rapid slide thereafter in the futures market meant that sellers were out in force in the local market today.

'Short-sellers' would perhaps be a more accurate description than mere 'sellers'. As OCBC Securities said on its website today: 'Without some shorts in your portfolio you cannot insulate yourself in a structural bear market. The bottom line is that you cannot just buy equities and hope for the best. The degree of uncertainty affecting company business prospects and business models is as challenging as trying to predict a terrorist attack, or waging a war without sending the US Budget deficit to unsustainable levels.'

In line with pressure throughout the region - and in response to a 100-point collapse in the Dow Jones Industrial Average futures contract - the Straits Times Index plunged 30 points by lunchtime and spent the rest of the day bobbing around, supported mainly by the shorts covering themselves.

Pressure intensified when Europe opened in the late afternoon, and the end-result was a net loss of 36.84 points or 2.7 per cent at 1,302.85.

It was lowest close so far this year, surpassing the previous level of 1,318 reached on Jan 7. Perhaps disconcertingly, today's fall was on elevated volume. Excluding foreign currency issues, 249 million units worth $342 million were traded - 61 per cent more than Tuesday's $212 million.

As always, banks provided the biggest drag. The combined losses posted by UOB, DBS and OCBC sliced 23 points off the index, while SPH's 50-cent slide to $18.40 accounted for another 2.7 points.

Tech stocks continued to suffer a torrid time, Venture Corp being the best relative performer with only a 10-cent drop to $13. Datacraft Asia suffered most, losing six US cents to 68.5 US cents on volume of 14.4 million units.

Creative Technology, meanwhile, dropped 40 cents to $12 with 466 lots traded after it announced a net profit of US$18.9 million for its second quarter and dropped a bombshell by saying it is delisting from Nasdaq.

In a 'sell' call, Kim Eng-Ong Asia described Creative's results as better than expected, since the market consensus had been a figure of US$13.9 million. But the local broker said it finds it hard to get excited about the counter because revenue continues to decline with no sight of a turnaround.

'Although it has done a good job in controlling cost, there is a limit as to how much more savings it can extract,' Kim Eng-Ong Asia said. 'Gross profit is already at record levels and is unlikely to rise significantly. We have cut our full-year sales and profit forecasts by 4 and 6 per cent respectively ... At current levels, the stock is trading at 24 times FY03 earnings and is not cheap.'

Similarly, GK Goh called a 'market perform' on Creative, recommending clients 'short on strength' as there is 'no catalyst for performance'.

Elsewhere, Keppel Corp dropped 10 cents to $3.74 after it announced a 33 per cent increase in earnings to $356 million for last year.

OCBC Securities rated the counter a 'market perform', saying that although profit was within expectations, momentum is likely to slow for FY03 and earnings will probably only rise a modest 6 per cent.

'Downside will be limited by its attractive dividend policy, relatively inexpensive valuations, 20 per cent discount to revalued net asset value as well as the anticipation of further capital payments on the successful disposal of a non-core asset,' OCBC Securities said.

On the outlook for equities, BCA Research said: 'The worsening global energy crunch, rising anxiety about war and the halting nature of the business cycle recovery are spawning a renewed sense of pessimism. Market psychology has become fragile and sentimental. Fear is the dominant emotion and additional losses in global share prices are possible.'

www.vheadline.com Posted: Wednesday, January 29, 2003 - 2:46:04 AM By: Robert Rudnicki

A high-level delegation of representatives from the "Friends of Venezuela" group as due to arrive in Caracas tomorrow, Thursday, to lend their weight to Organization of American States (OAS) secretary general Cesar Gaviria's efforts to bring the ongoing political stalemate to a peaceful and democratic solution. 

The group, composed of Brazil, Chile, Mexico, Portugal, Spain and the United States, held its first meeting last week in Washington, during which Foreign Ministers from the six nations discussed possible ways to end the crisis, including the two proposals put forward by former US President Jimmy Carter. 

Calls by President Hugo Chavez Frias and members of his government that other nations such as Algeria, Cuba, China, France and Russia should be included in the group, have so far been met with refusals, but Cuban leader Fidel Castro said he would consider joining if he were asked. 

Ahead of the group's arrival, Coordinadora Democratica leaders are considering lifting certain areas of the work stoppage, in what they claim to be a goodwill gesture.