money.cnn.com February 27, 2003: 8:59 AM EST

VIENNA (Reuters) - OPEC said Thursday it can cover any stoppage of Iraqi oil during war without the need for consumer countries to release emergency reserves even as crude prices hit a 12-year high.

Speaking as U.S. oil prices set a post-Gulf war high of $38.66 a barrel, cartel Secretary-General Alvaro Silva said: "This is not a problem of oil in the market, it is a problem of speculation."

"Yes, we are confident we can manage the situation given the level of production in Iraq," he said. "OPEC has been managing the case of Iraq for more than 10 years. We will try to alleviate the situation in the normal way and meet our commitment to stabilize the market," he told reporters at OPEC headquarters

U.S. light crude spiked $1.04 to $38.74 a barrel, the highest oil price since Iraq's invasion of Kuwait in 1990 when crude peaked at over $41. London Brent gained 66 cents to $33.52, near a two-year high.

A frigid winter in the U.S. also boosted demand for oil products, particularly heating oil.

"It's all down to a shortage of heating oil and natural gas in the United States, backed up by the prospect of war," said Christopher Bellew of brokers Prudential Bache in London.

OPEC's Silva said the producer group was already pumping beyond official output limits but could not stop speculators driving oil prices higher.

"We put 2.8 million barrels a day more in the market in December and January and you can see the result," he said of extra OPEC output.

Industrialized consumer nations, including the United States, have yet to decide whether or not they will release crude from emergency stockpiles, should the U.S. launch an attack against Baghdad. Spare cushion

Producers are hoping they can convince the Paris-based International Energy Agency, which controls the reserves, that a repeat of its 1991 Gulf War emergency drawdown will not be required.

The group says it has the capacity to fill any shortage from Iraq, as well as compensate for shortfalls from Venezuela, where a strike is in its 12th week.

It will want to avoid the IEA triggering sales from the huge reserves held among 26 member countries that include the U.S., Germany and Japan for fear the extra oil will cause a slump in prices after any war.

Silva said producers had another four million barrels a day of spare supply ready to call on, easily enough to cover Baghdad's 1.7 million bpd of exports.

Saudi Arabia already thought to be pumping nine million of its available 10.5 million bpd, independent experts put spare supply in the cartel at little more than two million.

OPEC meets March 11 and is expected to leave official supply quotas unchanged.

"Until now 24.5 million is enough, " said Silva of the official limit for 10 member countries.

Delegates have said OPEC may suspend quotas altogether during the period of any war, although Silva played down that possibility.

"It is not an issue of suspending quotas. The quotas have been functioning well," he said. "But of course in the case of catastrophe that's another question. Nobody knows the result of a war."  

www.smh.com.au By Matt Wade February 28 2003

Businesses shrugged off the threat of war, drought and global economic gloom and spent up on investment last quarter, but the relentless rise in oil prices continues to haunt the economy.

Capital expenditure rose 13.8 per cent in the December quarter to be up 24 per cent in 2002, the Bureau of Statistics said.

"Corporate Australia is taking advantage of solid profit growth and healthy consumer demand to both upgrade and update its assets," CommSec senior analyst Craig James said.

There was no sign that global uncertainties have taken much of a toll on future investment plans, with local firms reporting solid investment intentions.

"Australia is two years into a business investment upturn and [this] data points to it extending into 2003-04," Deutsche Bank senior economist Tony Meer said.    advertisement       advertisement

Investment in plant and equipment was up a strong 17.1 per cent in the December quarter and is expected to lead the way in the months ahead, analysts said.

Investment in buildings and structures was up 3.6 per cent in the quarter.

Investment by miners and manufacturers stood out and transport was boosted by spending by Qantas and Virgin Blue.

Official economic forecasts have been counting on business investment contributing significantly to economic growth this year, and yesterday's figures confirmed these expectations.

HSBC senior economist Anthony Thompson said the capital expenditure figures were stronger than expected considering the confidence-sapping global backdrop.

"Considering the survey was taken during January-February, when business confidence fell back under the weight of geopolitical concerns, investment plans for both 2002-03 and 2003-04 are very strong," he said.

The investment strength made an imminent interest rate cut even less likely.

"The Reserve Bank's confidence in the economic outlook has been reinforced by the solid investment result," CommSec's Mr James said.

"With unemployment low, business and consumer spending healthy and construction activity booming, the Reserve Bank has no domestic justification to cut interest rates."

But with world oil prices reaching a post-Gulf War high just under $US38 a barrel on Wednesday night, developments overseas still pose a significant risk to the local economy.

Fears that war in the Persian Gulf will affect oil supplies and reduced supplies from major oil producer Venezuela have triggered a sharp rise in fuel prices.

Many oil market analysts believe the price of crude could soon move above $US40 barrel, pushing petrol prices higher.

Higher fuel costs could cause local businesses to review investment and employment plans and force consumers to cut spending, with negative consequences for the economy.

The Merrill Lynch Leading Indicator, released yesterday, rose marginally in December but points to slower economic growth in Australia.

"We expect the leading indicator will continue to point to a slowing economy over coming months. However ... the slowdown in the Australian economy over the next six to nine months is not expected to be severe," Merrill Lynch Australian economist Trent Barnett said.

DEIRDRE MCMURDY Freelance Thursday, February 27, 2003

TORONTO - There was jubilation in Whistler, B.C., on Sept. 30, 2002. While the rest of Canada was still easing gently from summer into autumn, the resort town two hours north of Vancouver embraced the first snowstorm of the season - and the eight centimetres of powder it deposited in the surrounding mountains.

For local residents, that premature blast of winter ensured a strong start to a seasonal tourism industry that represents millions of dollars in annual revenue for multinational corporations like resort-owner Intrawest and Fairmont Hotels - as well as the thousands of people they employ and scores of small, independent businesses that serve the market.

Weather has become much more than the subject for stilted small talk in awkward social encounters. In an intensely competitive global economy, it's a variable that affects the performance of almost $3 trillion U.S. in North American economic activity.

In fact, it's now considered such an important determinant of business success or failure that Environment Canada's quarterly seasonal outlook is carefully guarded until its release. At the annual meeting of the American Meteorological Society earlier this month, some experts argued that the federal government must start treating its weather data like insider information.

"Details about the weather can move commodity prices - especially when it comes to trading futures contracts," explained David Phillips, senior climatologist with Environment Canada. "We treat that seriously."

Weather is now taken so seriously, that even the Central Intelligence Agency has started tracking weather patterns based on the rationale that they directly affect economic conditions, which in turn influence political trends.

"Weather is no longer seen as a random act of fate. It's very much part of the long-term decision-making process for business now," Phillips said.

Last year's mild winter in the United States is credited with staving off a full-blown recession by some economists. They claimed that lower heating costs, reduced snow removal bills, higher construction income, reduced transportation costs, fewer insurance losses and stronger retail sales combined to generate about $21 billion U.S. in economic activity - all because of the balmy temperatures. Housing starts, for example, jumped 6.3 per cent in January 2002, the highest level in two years.

That's not about to happen this year, however. Record cold spells - along with geopolitical turbulence in the Middle East and Venezuela - have created an imbalance in the supply and demand for heating fuel and gasoline. Normally at this time of year, refiners begin to build their inventories of gasoline in anticipation of increased driving volumes in the spring. This year, they're still struggling to meet the demand for heating-grade fuel - which could create a gasoline supply shortage later this year.

Natural gas prices have spiked by as much as 40 per cent - again, a function of robust demand outstripping easily-available supply.

Many electric power utilities have also faced a crunch, especially in light of their recent deregulation. Previously, when they encountered sharp increases in demand and soaring costs, regulators would allow them to pass along expenses directly to consumers. Now that they must compete in an open market, it has become tougher to pass along the costs to consumers.

Technology has played a critical role in the business sector's effort to get a grip on variables like weather. Intricate computer models fed by satellite data can now map out where high pressure ridges and storm systems will form weeks in advance. As a result, a three-day forecast is now about as accurate as a 24-hour forecast was 20 years ago.

This technology has also allowed weather to morph into a sophisticated financial product that has even begun trading on the Chicago Mercantile Exchange. The weather derivative market emerged around 1997, and less than three years later, it was valued at $8 billion U.S.

Weather derivatives let a corporation limit its weather-related losses by transferring a portion of the risk to an investor.

Given the heightened emphasis on forecasting weather and its economic effects, a growing number of companies are hiring in-house meteorologists. Transportation companies, oil and gas producers, utilities - even large brokerage firms now have them on staff to track conditions for futures traders and their clients.

Despite its formidable scientific and economic force, however, weather will never cede its place in our social interaction. After all, there's no subject quite as relevant anywhere in Canada: So is it cold enough for you?

Deirdre McMurdy is host of Moneywise, Monday to Friday at 12:30 p.m. on Global Television.

news.bbc.co.uk Last Updated:  Thursday, 27 February, 2003, 22:45 GMT

Aid agencies have warned that the international community has some dramatic decisions to make if diplomacy fails and war starts in Iraq.

They say extra funding is needed to prepare for the consequences of a conflict.

Do you think the world is doing enough to prepare for the humanitarian consequences of a second Gulf war?

We'll be discussing this subject in our phone-in programme, Talking Point, this Sunday at 1400GMT on the BBC World Service. Our guest will be Executive Director of the United Nations Children's Fund, Carol Bellamy. Please leave a phone number with your comments if you'd like to take part. It will not appear online.

www.koreaherald.co.kr

To many on Wall Street, the U.S. State Department and the IMF, the specter of Che Guevara and past legions of bearded, bandana-wearing commandantes is haunting Latin America. Not without reason. Left-leaning military officers have been on a roll lately. But another ghost haunts the continent: economic ignorance about Latin America in the capitals of the West.

Brazil's new President Luiz Inacio Lula da Silva was elected with the same great expectations that brought the ex-paratrooper and coup leader Hugo Chavez to power in Venezuela three years ago. But it would be unwise to paint President Lula as a dangerous populist just because his political base resembles that of the wayward Chavez.

President Lula's poorest supporters undoubtedly expect him to transform Brazil from the world's most unequal society into a modern social democracy. His middle-class backers are no less eager to see their living standards grow. But despite these expectations, Lula is unlikely to pursue anything like the chaotic "Bolivarian Revolution" Chavez unleashed.

Expectations are always the hardest thing for leftist leaders to manage. For example, Lula's Workers' Party, which rejected pension reforms submitted by the previous Cardoso administration, expects Lula to preserve far more of the scheme than former President Cardoso believed possible.

More demanding are the expectations of speculators and investors in New York and London. They expect Lula to accomplish the equivalent of Nixon's trip to China - to be the leftist who hard-headedly balances Brazil's budget, eliminates foreign investors' fear of debt repudiation via hyperinflation, and gives them fat capital gains on their Brazilian stocks and bonds.

Unlike in Venezuela, there is a viable scenario in which both visions - macroeconomic orthodoxy and greater social justice - can be realized. Suppose Brazilian interest rates stabilize at a high but not astronomical 10 percent, the economy grows at 4 percent per year, and the government achieves a "primary surplus" - a surplus of taxes over program spending - equivalent to 4 percent of GDP. These are all feasible targets; if they are met, then Brazil's government debt will be a stable 60 percent of GDP.

Once investors see that Brazil's fiscal policy is sustainable, and they see continued low interest rates in the industrial core, Brazil will look more attractive. Foreign direct investment will flow in, bringing more access to world-class technology and further boosting economic growth.

Soon, Brazil's government would find itself able to roll over its short-term debt on more favorable terms, as interest rates drop below 10 percent. Reduced debt-service costs would mean that the debt/GDP ratio would start to fall, and government spending on infrastructure, education, healthcare, and redistribution could rise. Reduced government debt would also means more money available for private investment, providing a further boost to labor productivity.

But all of this would require extraordinary patience on the part of the Workers' Party and its supporters, whose hopes must be deferred as immediate priority is given to appeasing the bond market. Will Lula have sufficient command over Brazilian politics to keep his supporters and political cadres happy with promises of jam tomorrow when it is clear that there will be no bread today?

Indeed, a strategy of bond-market appeasement may turn out to be futile, because it places a huge bet on the rationality of global financial markets. But the people in New York and London who set interest rates know little about Brazil. They know that Ipanema is a beach, that the Amazon is a river, that ex-U.S. Treasury Secretary Paul O'Neill worried that money loaned to Brazil would reappear in numbered European bank accounts, and that Lula is a president without administrative experience who heads a party with "workers" in its name.

Remember, these are the type of people who once thought that selling dog food over the Internet was a brilliant business strategy, and that by 2010 Qualcomm would be able to sell two mobile phones a year to everyone in the northern hemisphere. If such people cannot be appeased, or if they panic for no particular reason, then everything goes down the drain. Lula becomes a failure, and Brazil loses another decade as its economy sinks into a depression of uncertain length and suffers inflation of uncertain magnitude.

Once upon a time, Lula would have been able to rely on broad international support, as Cardoso did. The Clinton administration and the IMF educated financial markets about countries that they believed were following sound policies and that had bright long-run growth prospects. The U.S. Treasury under Robert Rubin and Larry Summers was unafraid to join the IMF in betting the store on Mexico, Thailand, Korea and Brazil when they thought the odds were favorable.

Perhaps this assurance of broad international support made it prudent - or at least less imprudent - to appease the financial markets first. It is not at all clear that the Bush administration and today's IMF can offer similar support. So Lula's odds do not look particularly high. But they still look better than the odds attached to any alternative political-economic strategy - and certainly than anything being offered by khaki-clad would-be commandantes.

J. Bradford DeLong is professor of economics at the University of California at Berkeley, and a former assistant U.S. treasury secretary. - Ed.