www.gopbi.com By Linzhi Shi, Palm Beach Post Washington Bureau Sunday, February 2, 2003

WASHINGTON -- As the Pentagon gathers forces in and near the Persian Gulf for a potential military confrontation with Iraq, policy-makers and experts in Washington are shifting their focus to the war's possible economic consequences.

In the worst-case war scenario, Americans could face more unemployment, a tumble of stock exchanges, long gas lines and restrictions on electricity use. If it is a quick victory, economists and analysts believe the impact would be minimal and that oil production from both a new Iraq and other countries eventually could bring oil prices down and stimulate the world economy.

Based on two congressional studies, economist William Nordhaus at Yale University estimates the war could cost the United States from $100 billion to $2 trillion and lead the global economy into recession.

The countdown to a possible war with Iraq is taking place at a time when world oil inventories are extremely tight. The U.S. Energy Information Administration recently announced that America's crude inventories had fallen to near-critical levels because of the ongoing strike in Venezuela, which supplied about 13 percent of U.S. oil imports.

Oil dealers are worried a war in the Persian Gulf could cause an upheaval in the market and send oil prices soaring to or beyond the 1991 Gulf War highs of $40 a barrel, which contributed to a global recession in the early 1990s. The current oil price is about $33 a barrel.

Iraq has the world's second-largest proven oil reserve, estimated at more than 112 billion barrels. After a dramatic decline because of sanctions on oil exports after the 1991 war, Iraqi oil output gradually recovered with the introduction of the U.N. "Oil for Food" program, which allows Baghdad to sell its oil under international sanctions to gain cash to buy food and meet other social needs.

Some 3.3 billion barrels of Iraqi oil valued at about $62 billion have been exported under the U.N. program since December 1996. In 2001, Iraq was the fifth-largest crude oil provider to the United States, supplying 8.5 percent of oil imports.

However, fears of war made U.S. oil companies radically cut back purchases from Iraq in the past year. Now, the United States imports a relatively small amount of crude oil from Iraq, less than 3 percent of its oil consumption, according to the American Petroleum Institute.

Experts say war carries two potentials: Stabilizing the Gulf region, lowering world oil prices and stimulating the U.S. economy; or bogging down into a months-long conflict with deep economic, political and environmental consequences.

"The key is which scenario plays out," said Robert Ebel, director of the energy program at the Center for Strategic and International Studies, a Washington think tank.

lshi@coxnews.com

Quick war

A decisive U.S. victory in four to six weeks would interrupt Iraqi oil production and prevent its crude from reaching the market for about three months, experts predict. A quick war reduces the risk of damage to oil-production facilities in the region. Increased production from other countries could offset the loss of Iraqi oil on the world market.

Analysts at the Center for Strategic and International Studies predict oil prices would spike at the start of hostilities. But prices eventually would fall to the low $20 a barrel by the end of the year, as a result of high production from both OPEC and non-OPEC countries.

Some analysts suggest the U.S. economy would grow faster with a quick war than if there were no war, because a decisive victory would ease investors' fears about the future, leading to more business investment and consumer spending.

This is the scenario the Bush administration is betting on, said William Nordhaus, a Yale University economist and co-author of the study War With Iraq: Costs, Consequences and Alternatives. White House strategists assume a quick U.S. victory could lead Iraq to achieve its full oil-production capability, he said.

But the Iraqi oil industry could face many challenges "the morning after" a war, said Ebel, energy program director at the Center for Strategic and International Studies. "Many experienced engineers and geologists have left. Will they return? Might they return? They need drilling and work-over crews. They need the rigs.... They need the latest oil field technology, the know-how, and managerial skills that go along with that technology."

Nordhaus also warns "the speed at which Iraq can increase its oil production should not be overestimated."

In the 1991 Gulf War, Saddam Hussein destroyed many of Kuwait's oil fields as he withdrew. The sabotage shut down Kuwaiti oil production for a year.

"I am almost certain that Saddam Hussein has that in his mind. He will probably set the oil fields on fire before he goes," said David Lesch, a Middle East expert at Trinity University in San Antonio who was a National Security Agency analyst during the 1991 Gulf War.

Prolonged war

Fighting could last six weeks to six months if Iraqi forces mount substantial resistance or Saddam Hussein was to try to use biological or chemical agents against U.S. troops or neighboring countries such as Kuwait, Jordan or Israel. Extensive damage to the oil-production facilities in Iraq and the region could cause oil prices to spike for at least two years.

Analysts at the Center for Strategic and International Studies predict that, in the worst case, Iraqi oil production could stop for the remainder of this year. Oil prices would jump to $80 per barrel and then fall back to $40 a barrel by the end of 2004 -- still substantially above the current level of about $33.

The result would be a U.S. oil shortage, requiring voluntary rationing in the short term. Steps taken during the oil shortages of the 1970s are among the possible schemes for dealing with a new shortfall, including: alternating days of gasoline purchases based on odd/even license plate numbers; limiting purchases to 8 gallons per fill-up; restrictions on heating and electricity consumption; bans on illuminated outdoor advertisements; and encouraging use of mass transportation.

A prolonged war also could adversely affect the economy by driving down stocks and inhibiting consumer spending. The unemployment rate could initially rise to near 7.5 percent and remain above 7 percent at the end of 2004, according to the Center for Strategic and International Studies.

During the 1991 war, the United States did most of the military fighting, yet 80 percent of the $60 billion in war costs was carried by Germany, Japan, Saudi Arabia, Kuwait and other U.S. allies.

Will these countries come forward again to pay the bills in what would likely be a more expensive war, estimated by academics and think tanks to range from $100 billion to $200 billion?

Experts say probably not, because a second Gulf War would be much different from the first.

Most of the burden will fall on American taxpayers this time, they say.

lshi@coxnews.com

asia.reuters.com

War Clouds Gather Over Stocks Sun February 2, 2003 11:03 AM ET By Elizabeth Lazarowitz

NEW YORK (Reuters) - The winds of war have been buffeting Wall Street, sending skittish investors to the sidelines, and the storm is only likely to intensify this week as the White House makes its last diplomatic push for Iraqi disarmament.

With U.S. forces massing in the Middle East and the rhetoric from Washington heating up, the United States appears increasingly on the brink of war. The suspense has plunged key market gauges to their lowest levels in more than three months.

President Bush has said Baghdad has just weeks left to avert war, and Wall Street will be tuned in for anything that might give clues to a timeline for a possible U.S. attack on Iraq.

"Iraq will be the most important issue (this) week -- period," said Hugh Johnson, chief investment officer at First Albany Asset Management. Ordinarily, investors' focus would be fixed on the outlook for the economy and corporate profits, but "(this) week is just not going to be an ordinary week."

While brewing geopolitical events will likely shove nearly everything else to the back burner, a flood of economic reports -- particularly data on the manufacturing sector and the labor market -- could help determine Wall Street's mood.

The Institute of Supply Management's closely watched gauge of the factory sector, set for release on Monday, and the U.S. payrolls report on Friday will give investors some early glimpses of the state of the economy in January.

Evidence that the U.S. economy is pulling out of its soggy patch has been spotty, at best, and the increasing possibility of war has whipped up fears growth could stumble as corporate America puts off investment decisions and stubbornly high oil prices bite into corporate profits.

The steady parade of corporate earnings will probably also fade into the background somewhat, but Wall Street will be tuned in for results and, more importantly, forecasts from technology bellwether Cisco Systems Inc. CSCO.O and No. 4 U.S. long-distance telephone company Sprint Corp. FON.N

INDEXES DOWN

War worries have helped drive the broad Standard & Poor's 500 index .SPX down about 8 percent from its high for the year hit on Jan. 14 and into negative ground for the year.

Year-to-date, the S&P 500 and the blue-chip Dow Jones industrial average .DJI are both down around 3 percent, and the tech-packed Nasdaq Composite Index .IXIC is down about 1 percent.

All three finished the week lower after the S&P 500 and Dow posted their lowest closes since mid-October and the Nasdaq ended at its worst level since mid-November on Thursday.

Wall Street will be watching on Wednesday when Secretary of State Colin Powell goes before the United Nations Security Council to try to persuade doubters Iraq has weapons of mass destruction. Iraq denies it possesses banned arms.

"That stuff is in the way of the market right now. Nobody's going to want to go long in a big way until this Iraq thing gets cleared up," said Michael Vogelzang, president of Boston Advisors Inc. "It's just going dominate headlines. It's going to dominate investor sentiment."

Bush said on Friday at a joint press conference with British Prime Minister Tony Blair that the United States would resist any attempt to drag out the issue for months, but that he would welcome a second U.N. Security Council resolution if it offers a strong signal to Iraqi leader Saddam Hussein.

Bush believes that a U.N. resolution in November gives authority for military force, but he faces opposition from major powers such as France, Russia and Germany.

Worries that a war could disrupt oil supplies, as well as a 2-month-old strike that has crippled oil production in Venezuela, a major U.S. supplier, have helped push the price of crude oil above $33 a barrel.

Those high prices have sparked fears that corporate profits, already tepid, could take another blow as companies and consumers are forced to shell out more for energy costs.

EARNINGS, ECONOMY STILL UNSTEADY

The fourth-quarter results pouring in from corporate America have been, for the most part, encouraging. About 67 percent of the companies in the S&P 500 have reported earnings so far, and, of those, 62 percent have beaten Wall Street analysts' expectations and 22 percent have matched them, according to Thomson First Call.

What is troubling, however, is that the outlook for corporate profits in the year ahead remains decidedly murky.

"So far, the guidance continues along the lines of no visibility," said Charles White, president of investment firm Avatar Associates. "Companies don't even want to say anymore that they see things getting better in the second half, because that's what they told us last year."

Results are expected this week from technology bellwether Cisco, Sprint, medical device maker Boston Scientific Corp. BSX.N , consumer products company Colgate-Palmolive Co. CL.N , No. 2 U.S. drugstore chain CVS Corp. CVS.N , and No. 1 U.S. home appliance maker Whirlpool Corp. WHR.N .

Beverage and food company PepsiCo Inc. PEP.N and Anheuser-Busch Cos. Inc. BUD.N , the maker of Budweiser beer, also have results on tap.

But with the peak of earnings season now past, the economic picture is becoming increasingly important, analysts said.

The ISM report for January is expected to slip to 53.7 from 55.2 in December, according to economists in a Reuters survey. It would be the third month in a row above the 50 level that separates expansion from contraction, potentially cementing hopes the manufacturing sector is recovering from its slump.

The report on non-farm payrolls will be the economic highlight of the week. Payrolls are seen rising by 70,000 in January after a 101,000 drop in December, while the jobless rate is expect to remain steady at 6.0 percent.

(Wall St Week Ahead appears weekly. Comments or questions on this one can be e-mailed to Elizabeth Lazarowitz, elizabeth.lazarowitz(at)reuters.com)

Fog of War Clouds Economic Forecasts Sun February 2, 2003 11:05 AM ET By Tim Ahmann

WASHINGTON (Reuters) - War jitters are clouding the U.S. economic outlook, making it hard to discern the recovery's underlying state of health and difficult to forecast what will happen when the current uncertainty lifts, economists say.

"What happens this year is sort of anybody's guess," said Martin Baily of the Institute for International Economics.

Like many economists, Baily, who served as a top economic adviser to former President Bill Clinton, believes concerns over the potential damage a war could wreak on the economy has already made businesses reluctant to hire and spend.

But he also said the U.S. recovery is being restrained by more than just concerns over a possible war with Iraq.

"We had an excess of (business) investment, we had a way overvalued stock market and we are still working our way through those things," he said.

In the view of economists at the Wall Street firm Goldman Sachs, war fears take a back seat to a hangover from the bursting of a stock market bubble.

"It simply isn't plausible that households or firms are retrenching because there could be a war halfway around the world, a war in which the United States is expected to prevail quite easily," Goldman Sachs economist Jan Hatzius wrote in a recent note to clients.

In a recent survey, the newsletter Blue Chip Economic Indicators found forecasters, on average, looking for growth of 2.8 percent this year, which would mark a slight pickup from last year's sluggish 2.4 percent.

In general, economists see a weak first half of the year followed by accelerating growth once war clouds pass. But there appears to be an unusually large range of forecasts, in part because of split views over what is holding the economy back.

WEIGHING THE RISKS

In announcing its decision to hold interest rates steady at four-decade lows earlier this week, policymakers at the Federal Reserve gave the war-fears argument a nod.

"Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses," the Fed said in its rate announcement, adding the economy should improve "over time" as risks lift.

Some analysts said the Fed's phraseology of "reportedly" and "over time" suggested policymakers at the central bank see the recovery saddled with more than just war.

Nevertheless, the central bank reiterated its view that economic risks were balanced between weakness and a possible rise in inflation -- a view some analysts see as disingenuous.

"The economy clearly has a downside risk that exceeds any risk of inflation at this juncture," former Fed Governor Wayne Angell said. "They've misled the market a little on the side that the prospects for recovery may be brighter than they actually think they are," he said.

However, some think the economy could show surprising strength if war-related economic risks fade.

"The risks in the near-term are titled to the downside and they are significant," said Rick Egelton, deputy chief economist at BMO Financial Group. "Longer-term, if this (war) cloud is to rise, I think the risks by and large may be on the upside."

Egelton said extremely low interest rates, coupled with the prospect for stimulative tax cuts, suggest the economy could be growing solidly by year-end.

CRYSTAL BALL

Even some economists who question whether the cloud of war is the main factor restraining growth see better days ahead.

"The dynamics are good," Conference Board Chief Economist Gail Fosler said. A pickup in consumer spending in the final month of last year and the extremely low level of inventories held by businesses suggest production is likely to get a boost early this year, Fosler said.

She also thinks businesses will soon need to raise spending on high-tech gear, which has a relatively short useful life.

"You're getting to the end of being able to implement a kind of break and fix strategy with respect to your (information technology) spending," Fosler said.

"There are clearly downside risks but it would be hard to say ... those risks are predominant," she said.

While it may come as no surprise economists are not speaking with one voice, the range of opinions is striking.

However, forecasters do seem to agree on one point, the U.S. economy, while it may look forward to better days, is not yet out of the woods.

"I'm sorry I don't have a better crystal ball for you, but I actually don't think anybody else does either," Baily said.

www.nytimes.com By GINGER THOMPSON

CARACAS, Venezuela — Like a true spy, Franklin Chaparro was careful not to give away too many details about his assignment.

Mr. Chaparro, who once was the government's chief explosives specialist and director of Venezuela's state intelligence agency, has begun using his expertise as the architect of his neighborhood watch association.

Think Orwell, not Rockwell.

Mr. Chaparro lives in Cumbres de Curumo, a neighborhood of high-rise condominiums on the south side of Caracas, the capital. At a recent meeting with other neighborhood leaders, Mr. Chaparro agreed only to explain the association in broad details. Tactical units had been organized to take charge of food supplies, medical care, communications and combat. At least one private elementary school had been equipped with radios for constant contact with the police. Teachers had been trained to help children in hostage situations.

The association, residents said, had registered every member of more than 1,200 families, taking note of children and elderly residents with special health needs. They posted lists in every building with the names and phone numbers of doctors whose homes would be used for emergencies. They had also inventoried every household for weapons.

"People are arming themselves, legally and only for their own self defense," Mr. Chaparro said. "There are open threats by this government that have made people feel like they need to be prepared to protect themselves."

Consider it Venezuela's version of homeland security; a vivid example of the social distress caused by months of political tensions that have divided this country into rival camps. Middle-class neighborhoods across the city, where opposition to President Hugo Chávez runs deepest, have drawn up neighborhood watch plans that seem more suited to stopping an invasion than crime.

Leaders of several groups said they were not aiming to develop first-strike capabilities against the Chávez government, and they said they did not encourage everyone to go out and buy guns. But with this country teetering on the brink of anarchy, middle-class and affluent families said they felt increasingly afraid that the left-leaning Mr. Chávez was preparing to install a communist system that would force them from their homes and businesses. They accuse the government of arming pro-government groups, called the Bolivarian Circles after South America's liberator, Simón Bolívar. The residents said they had every right to defend themselves.

Not everyone has embraced the militarized neighborhood watch plans. Law enforcement analysts and local elected officials said that if the potential for danger were not so deadly serious, the plans would be downright silly.

Ana Maria Sanjuán, an expert from the Central University of Venezuela on human rights and crime, called the plans "extremely dangerous" because they were driven more by rumors — published by newspapers and circulated on the Internet — than reality.

One e-mail message, circulating recently among Cumbres de Curumo residents, warned that Mr. Chávez was preparing "to order the inhabitants of the poorest neighborhoods to come down by surprise and ransack and occupy the houses of the middle class, silencing the media."

The e-mail message added: "The National Guard already has orders not to intervene. Their call is only to go out to recover bodies. That is the reason that months ago, the national government bought 30,000 body bags." A story published by the daily newspaper Tal Cual rebutted the e-mail message, reporting that every Caracas hospital had denied receiving body bags.

While this capital of four million people has one of the highest per capita murder rates in the region, violent crime is rare in affluent sections of the city. The poor are typically the perpetrators and victims, Ms. Sanjuán said.

"Someone is going to end up dying because of this," she said. When asked about the residents' fear of government-sponsored terror, she said: "This is not real. They invented this."

The fear, however, seems real. Gun sales have soared, Ms. Sanjuán said, estimating that there were more than 600,000 registered and unregistered weapons on the streets. The number of private security guards doubled in the last few years, newspapers report, to 200,000. And neighbors who once barely spoke to one another have formed community war councils.

Rafael Arraíz, a poet, spoke of a "middle class turned hysterical" by the rhetoric of Mr. Chávez, a former army officer, and the daily predictions of apocalypse by opposition leaders. "They entrench themselves in their neighborhoods," he said, "waiting for an invasion by hordes of revolutionaries."

Several neighborhoods have blocked access to streets with metal fences or barbed wire, or both. Others have bought tires and bags of cement to erect barricades.

Signs posted in condominiums and community clubhouses advise residents how to barricade homes with mattresses and furniture; how to make bombs with bottles, nails and gasoline to repel mobs of looters; how to use swimming goggles in case of a tear gas attack. Some churches have been equipped to serve as emergency medical centers.

In the La Tahona neighborhood, Alfredo Rosas, a chemist, said residents of his eight-story condominium planned to throw Molotov cocktails from the roof if attacked.

"Maybe we'd kill a cat," he said, half joking. "But more than likely we would set our building on fire."

In Cumbres de Curumo, residents seem to take their security a little more seriously. Leaders of the neighborhood watch association boasted that parts of their "contingency plan," were taken from a United States counterterrorism manual.

"Let's just say that if Chávez sends his circles," said Luis Velásquez, a resident, "we do not plan to use Gandhi techniques."

Mayor Leopoldo López, who governs one of the five municipalities in this metropolitan area, has appeared at neighborhood meetings to persuade people to leave security matters to the police.

"I first began to worry about this when I went to a meeting where 80-year-old retirees were telling me they had just bought their first shotguns to protect themselves, and housewives were talking about making Molotov cocktails," Mayor López said. "That's when it hit me: fear is turning into paranoia."

www.nytimes.com By JUAN FORERO

CARACAS, Venezuela, Feb. 1 — With large numbers of businesses across Venezuela opening to offset huge financial losses from a 62-day-old general strike, opposition leaders said today that they would scale back the walkout next week so that factories, shops, malls and schools could reopen.

The strike, which has failed in its originally stated mission to force President Hugo Chávez to resign or to call early elections, will continue only in the all-important oil industry.

But the decision, which opposition leaders said would be explained in detail in a news conference on Sunday night, was seen as a clear victory for Mr. Chávez, who has played down the walkout while calling its organizers fascists and coup plotters.

The government's opponents characterized their action as a new phase in their efforts to unseat Mr. Chávez. They asserted that the strike, which began Dec. 2, had led to international participation in Venezuela's political crisis and pressed the government into negotiations that could lead to an electoral solution.

"Now that there is a concrete proposal for elections, the Venezuelan conflict is going into a new phase where the key to the protest is no longer the strike but negotiations," said Jesús Torrealba, executive secretary of the opposition group's coordinating committee.

But the fact is that for many days the strike has been one in name only, with Venezuelans having tired of a walkout that had devastated their economy while bringing none of the results promised in December. The blow to the Venezuelan economy, Latin America's fourth largest, is estimated at $4 billion in lost oil revenues alone.

"We share the opposition's opinion, but we live by working," said Maritza Rondón, owner of a wholesale hardware store in Venezuela's second-largest city, Maracaibo, that reopened weeks ago. "Our business has nothing to do with our politics."

Alfredo Chirino, owner of an auto parts factory in Caracas that reopened this week, said he could not keep his business closed any longer. "We wanted to have some income, and we had to meet some commitments dating back to November," he said. "We needed to bring in income to pay our workers."

The reopening of businesses appears to give Mr. Chávez the upper hand in negotiations with the opposition that are being mediated by the Organization of American States. The government's position could be further solidified as the state-owned oil company continues to reactivate oil production.

"The opposition has basically lost the strike," said Gregory Wilpert, an American here who is finishing a book about the Chávez era. "They gambled that the strike would get rid of Chávez, and the strike failed. They now don't have many other options."

Indeed, opposition demands that Mr. Chávez resign, often heard in December from his foes, have dissipated. Instead, the two sides are now expected to mull over two electoral solutions to the crisis that were proposed last month by former President Jimmy Carter and have the support of the United States and five other nations whose representatives met on Friday with Mr. Chávez and his opponents.

But opposition leaders, who called their decision today a goodwill gesture toward the government, said they would continue to apply pressure.

On Sunday, they plan to hold what is being called El Firmazo — loosely translated as "the big sign-up" — a petition drive. Organizers are hoping to collect hundreds of thousands of signatures to support a constitutional amendment to shorten the president's term and lead to new elections.

In the meantime, Mr. Torrealba and other opposition leaders said that the movement would continue to hold street demonstrations and that some businesses would open their doors but reduce their hours of operation as a sign of protest.

www.taipeitimes.com BLOOMBERG Sunday, Feb 02, 2003,Page 6

Crude oil fell after UK Prime Minister Tony Blair said the US should seek a UN resolution authorizing force against Iraq before taking action to disarm the Persian Gulf oil producer.

Blair, the strongest supporter of US efforts to rid Iraq of banned weapons, met with President George W. Bush in Washington today. Oil prices have risen 23 percent in the past two months, spurred by war concern and a strike by oil workers in Venezuela.

The US plans to present evidence of Iraqi arms violations to the UN next week.

Crude oil for March delivery fell US$0.34, or 1 percent, to US$33.51 a barrel on the New York Mercantile Exchange. Prices, which gained 0.7 percent this week, are up 72 percent from a year ago. In London, the March Brent crude-oil futures contract fell US$0.11 to US$31.10 a barrel on the International Petroleum Exchange.

Venezuela's oil production has increased five-fold this month to about 1.055 million barrels a day, strikers said in a press statement. They estimated output at 190,000 barrels a day on Jan. 1. Venezuela was producing about 3 million barrels daily before the nationwide strike began on Dec. 2.