www.nola.com Saturday March 08, 2003 By John M. Biers Energy writer

If gasoline prices seem higher than ever before, that's because they are.

Louisiana is one of more than a dozen states that have reached historic highs in recent weeks in terms of prices at the pump. The average price around the state Friday was $1.60 per gallon of regular, up from $1.50 a month ago, according to AAA's Louisiana chapter.

It's a high gasoline prices have maintained since Feb. 20, when they topped the previous peak of $1.58 set in May 2001, AAA spokesman Don Redman said.

Economists are increasingly worried about the impact of high gasoline prices as part of a broader energy crunch that already has produced record-setting natural gas prices and unusually high crude prices. Crude closed Friday at $37.78 on west Texas intermediate, compared with $23.71 one year ago. Natural gas closed at $7.43, compared with $2.73 last year.

If not abated, the high gas prices will curtail driving this summer, Redman predicted. But the association continued to see brisk business last week from Carnival-weary locals who fled the city for Disney World and other destinations.

"It doesn't appear yet that we've seen people dramatically change their lifestyle," Redman said.

Frank Goloforo, owner of Big G's Trash Hauler in Kenner, said he was rankled by the increase.

"It's disgusting," said Goloforo, who is paying $1.83 per gallon for diesel. "I should be paying $1.40."

High gasoline prices, the subject of a front-page story in Friday's Wall Street Journal, have also revived interest in energy on Capitol Hill. Although the top concern in Washington remains the possible war in Iraq, energy has risen as a priority in recent weeks, said Ken Johnson, a spokesman for House Energy Committee Chairman Rep. Billy Tauzin, R-Chackbay.

"It's a problem that could become a crisis overnight," Johnson said.

Though the natural gas price spike has been partially caused by cold weather this winter, the rise in gasoline prices is primarily linked to geopolitical events of recent months.

Venezuela, one of the United States' top sources of foreign oil, essentially ceased production for several weeks this year during a strike directed at President Hugo Chavez. Energy experts say it may take months for the South American country to fully restore production.

The energy markets also have been spooked by the potential U.S.-led war against Iraq. Although Iraq itself represents a small percentage of world oil production, the fear is that a military conflict could destabilize the oil-rich region. This anxiety has helped drive up crude prices, which has in turn discouraged U.S. refiners from purchasing oil, which has led to an erosion of U.S. gasoline supplies.

The high prices have sparked renewed calls in Washington for President Bush to release oil from the Strategic Petroleum Reserve. The administration continued to say Friday that it would authorize a release only under a "severe price disruption," a Department of Energy spokesman said.

Johnson said Tauzin agrees with Bush's restraint on tapping the reserve but that Bush needs to state clearly that he will take action if such a disruption occurs. "Just the promise he would release the oil would calm things down a bit," Johnson said of the financial markets.

Tauzin plans to advance an energy bill in coming weeks, with the House expected to take up the bill before the spring recess. The timetable is less certain in the Senate. Despite 18 months of activity, the energy bill died last fall when the two chambers could not agree on electricity legislation, drilling in Alaska and various other issues.

Bill Wicker, a spokesman for the Democratic staff of the Senate Energy Committee, said high energy prices continue to lag behind Iraq and the North Korean crisis as legislative priorities.

"It's definitely heating up, but it's not at full boil yet," Wicker said of energy. . . . . . . .

John Biers can be reached at jbiers@timespicayune.com or (504) 826-3494.

www.pantagraph.com Saturday, March 8, 2003 By Eric Freehling Business editor

BLOOMINGTON -- Gasoline prices across the state have reached a record high for March, but prices are expected to continue to climb and set record highs for April, too.

The average price for a gallon of unleaded, self-serve gasoline across the state Friday was $1.71, according to Mark Bruno, a spokesman for AAA Chicago. "These are the highest prices we've seen in March since 1974 when we started the survey," he said.

In Bloomington-Normal, prices at the pump were a nickel a gallon higher. An informal survey of Twin City gas stations taken Friday afternoon showed the average price for a gallon of regular, unleaded gas was $1.76.

Bruno said a year ago, the average price of gasoline was $1.23 a gallon.

A month ago, the average price was $1.51.

The attorneys general of Illinois, Wisconsin and Iowa have asked the Federal Trade Commission to examine whether some gasoline wholesalers or retailers are unjustifiably raising prices.

In a letter sent Friday, Lisa Madigan of Illinois, Peg Lautenschlager of Wisconsin and Tom Miller of Iowa urged FTC Chairman Timothy Muris to have the agency examine the markets in their three states and asked for assistance in determining if there is any evidence of illegal price collusion.

Bruno blamed the price rise the price of crude oil, which hovered around $40 a barrel Friday, and on increasingly tight supplies of fuel caused as domestic refineries begin production of summer grade fuels that are mandated to go on sale May 1.

Dave Sykuta, executive director of the Illinois Petroleum Council, which represents state refiners and marketers, blamed four factors for the price increase.

He said demand for gasoline is up 3 percent so far this year, while at the same time unrest in Venezuela has disrupted oil imports from that country.

In addition, Sykuta said, continuing cold weather in New England has delayed refineries' changeover from home heating oil to gasoline, and the cost of crude oil is fluctuating from $37 to $40 a barrel because of "fear and anxiety about what may or may not happen in the Middle East."

The federal Energy Information Administration said by the end of February, gasoline inventories moved toward five-year lows, which is one of the reasons current pump prices are high.

The fuel crunch is caused, Bruno said, because refineries must begin producing reformulated gas that must meet clean air standards while continuing to produce winter-grade gasoline.

"There are 14 blends of reformulated fuel. It cuts into production time because the refineries just don't have enough capacity to meet the increased demand," he said.

Along with the Iraq situation, Bruno said, "Unfortunately, we've got a number of different things conspiring against us, and it's fair to say we're not going to see prices go down anytime soon."

In fact, the federal Energy Department predicted gasoline prices will reach a record national average of $1.76 a gallon in April.

The EIA said pump prices will remain around $1.70 a gallon during the summer driving season.

"It's really difficult to say when we are going to get any price relief," Bruno said.

Sykuta said it was pointless to forecast gas prices.

"A lot of things could change between now and summer to make it better or worse," he said.

www.delawareonline.com By MAUREEN MILFORD Staff reporter 03/08/2003

Delaware motorists, small business owners and independent gas-station operators are being battered by what petroleum experts are calling the "perfect storm" in the gasoline industry.

Several key forces that contribute to retail gas prices - from the flow of crude oil to the demand for heating oil - have converged in recent months, pushing prices nationwide to their highest levels since May 2001 when a gallon of regular unleaded peaked at $1.718 nationwide.

Prices Friday were inching close to the recent record, with regular grade selling nationally for an average of $1.684 a gallon, according to the AAA Daily Fuel Gauge Report.

In Delaware, the average price was $1.64 a gallon, though individual stations have been charging as much as $1.80.

The highest recorded price for regular unleaded in the state was $1.728 a gallon in June 2001, although prices adjusted for inflation were much higher in the early 1980s.

"To pay $10 and get 5.99 gallons of gas - it ticks me off," said Shannon Zuzek, 32, of Newport, as she pumped gas at the Newport Exxon Friday. Regular unleaded was selling for $1.669 a gallon there. "We use to budget $50 a month for gas, now it's $70 or $80."

Mary Beth Pala, 36, of Hockessin, said it now costs her about $45 to fill up her Chevrolet Suburban.

The Hockessin Texaco station where she was pumping gas Friday was selling regular unleaded for $1.719. "It annoys me," Pala said.

Experts are warning consumers to batten down because the recent price spike is weeks ahead of the annual rise in prices during spring and summer.

Changes from winter blends of gas to formulations for summer have driven up wholesale prices from March to May during the past 18 years, said Peter Beutel, president of Cameron Hanover, an energy risk-management company in New Canaan, Conn. Increased summer driving also boosts prices.

Still, experts said motorists shouldn't expect average prices to imitate those in California, where regular was selling for $2.057 a gallon Friday. Pump prices for regular gas are expected to average about $1.70 a gallon nationwide from April to September, with prices peaking in April at about $1.76, according to a forecast released Thursday by the Energy Information Administration, the statistical arm of the U.S. Department of Energy.

And gas prices are a bargain compared with other years. In today's dollars, gas in March, 1981 was selling for $2.90 a gallon. "Historically, it's cheap as a percentage of discretionary income," said David Costello, an economist with the Energy Information Administration.

But economists said they can't speculate what prices will do if war erupts with Iraq and crude oil supplies are further disrupted.

Even if a war ends quickly, it's not a forgone conclusion that prices will plummet. The oil market is still "fundamentally tight," he said. "The decline in prices is going to be pretty gradual."

Cost factors converge

Gas prices always vary widely because of seasonal changes and local market conditions.

But in recent months, several supply disruptions have pushed the price of crude oil up 65 percent, from $22.37 a barrel in March 2002 to $36.86 Thursday - a level not seen since October 1990, according to the Energy Information Administration.

• A general strike in Venezuela dramatically decreased crude-oil production. In 2002, Venezuela exported 1.19 million barrels of crude oil a day to the United States, or 13 percent of the country's total daily crude-oil imports, Costello said. While the general strike has ended, the recovery has been slow, he said.

• OPEC cut production in 2001, resulting in excess oil being used up through 2002.

• A cold winter in the Northeast has resulted in greater demand for heating oil, meaning refineries produce more heating oil at the expense of gasoline. Gasoline inventories at the end of February were about 5.6 percent below last year's levels, Costello said.

• Prices in the natural-gas market have risen because of the cold weather and low storage levels, Costello said. Oil prices also have a tendency to rise with the natural-gas market.

• Worries of a war with Iraq have driven up prices, although industry experts say it's difficult to quantify.

All this comes before the switch to summer blends. Because of the Clean Air Act Amendments of 1990, reformulated gasoline is required in metropolitan areas with ozone problems - or about one-third of the total U.S. gasoline market. Delaware is required to use reformulated gasoline statewide.

In winter, gas is allowed to contain more volatile components. But in summer those components must be removed to meet environmental requirements. To comply, refineries have to shut down equipment and clean it, a process that takes about 15 days and affects supplies temporarily. Prices also tend to rise by about 6 percent during summer, according to the Energy Information Administration.

"Get used to it, regardless of what happens in Iraq," said David Hinton, petroleum-industry analyst with the administration.

Prices vary widely

How gasoline is marketed also results in wide price disparities from state to state. Even in the same community, the difference in the price of regular unleaded can be as much as 12 cents.

Some prices have to do with proximity to supplies. In the oil state of Oklahoma, for example, the average price for a gallon of regular unleaded was $1.559 Friday. In New Jersey, with its refineries, the average price for the same gas was $1.566.

"Delaware is closer to a lot of sources of supply, but it's not Houston," Hinton said.

Federal and state-excise taxes also can drive up prices at the pump.

And gas can be higher in wealthier areas because of the cost of real estate, experts said. Greenville Amoco, though, has been able to keep its prices down because it's been in business there for about 40 years. "We don't have a big mortgage," said owner Joseph Di Donato.

Some convenience-store chains offer the lowest prices because they sell unbranded gasoline, industry experts said. Wawa Inc., for example, sells Wawa brand. "We build cost efficiencies into our model, and as long as we can obtain favorable costs we try to pass that along," said Lori Bruce, spokeswoman for Wawa.

Still, the effects of price increases are being felt across the board.

"Gas prices are the most visible commodity you buy because the price is right up there in big numbers that you see every day,'' said Michael Shanahan, spokesman for the American Petroleum Institute, which represents 400 oil and natural gas companies. "It has a very real impact on consumers because the economy runs on oil."

Independent station owners said they are finding it hard to compete.

Shawn Rodgers, owner of Dewey Beach Exxon, said he's selling regular unleaded for $1.599 a gallon, but paying $1.579 for it. With the average 2 percent fee he pays the banks for credit-card purchases, he said he's losing money.

"If this place wasn't in my family there's no way I could make it," he said.

Ken Hudson, owner of Kens Exxon in Lewes, is charging $1.719 for regular unleaded and finding it tough. Business at his 42-year-old establishment is down about 60 percent, he said.

"I don't know how much longer I can stand it," he said. "I hope something gives. If not, I'll have to go out of the gas business."

Small businesses that use a lot of gasoline - such as limousine, delivery and other companies that use automobiles and trucks - also are grousing.

"Everybody gets hurt," said John Killeen, owner of Touch of Elegance Limousine Service in New Castle. "I just have to bite the bullet for a while, and hopefully gas will go down. But if it doesn't and we go into summer when prices normally go up 10 to 15 cents a gallon, I guess I'll have to do something."

Reach Maureen Milford at 324-2881 or mmilford@delawareonline.com.

www.thestar.com Mar. 8, 2003. 01:00 AM

Venezuelan strike, cold winter drain U.S. fuel reserves Record gas prices likely this summer, Washington warns

NEW YORK—World oil prices hurtled higher again yesterday as the United States and Britain set a March 17 ultimatum for Iraq to disarm or face war.

A revised draft resolution circulated at the United Nations by British Foreign Secretary Jack Straw, backed by Washington, gives Baghdad 10 days to meet U.N. demands.

The two allies during that time hope to garner support in the bitterly divided 15-member United Nations Security Council for military action against Iraq, which ships around 4 per cent of world oil exports.

U.S. light crude climbed 78 cents to $37.78 a barrel, barely $2 short of a recent 12-year high. Brent crude futures rose 57 cents to $34.10 a barrel, a two-year high.

"News of that deadline is certainly keeping the market very strong," broker Christopher Bellew of Prudential Bache said in London. "Any final deadline will give the market another shove to the upside," said Tom James of Carr Futures.

Oil prices have jumped 20 per cent this year on fear that war in Iraq will hit exports from the Middle East, which pumps a third of the world's oil. Oil is almost 60 per cent more expensive than it was a year ago.

There also is growing concern that rising energy costs will strain a weak U.S. economy.

Iraq's March 17 deadline puts pressure on the Security Council to adopt the resolution as soon as possible. The United States and Britain intend to bring the issue to a vote on Tuesday, diplomats said.

An oil workers' strike in Venezuela and strong heating demand in a bitter northern winter have drained U.S. fuel stocks.

"It's still bitterly cold, and we just got six inches of snow,'' said T.J. Herlihy, a broker at Spectron Energy Inc. in New Canaan, Conn. "Winter's not over yet."

Washington warned Thursday that gasoline prices would hit record highs this summer.

Saudi Arabia, the biggest producer in the Organization of the Petroleum Exporting Countries cartel, has said it will raise production to meet any shortfall international market.

Consumer countries represented by the Paris-based International Energy Agency have also said they will release emergency stockpiles for the first time since the 1991 Gulf War if necessary.

Despite rising energy prices, the White House says U.S. President George W. Bush is inclined to tap America's Strategic Petroleum Reserve only in the event of an emergency.

reuters news agency

www.dailystar.com.lb

How high could oil prices rise if the war on Iraq does take place in the days or weeks ahead would depend on how long the fighting lasts and how much damage Iraq’s oil fields sustain. The most likely scenario is for oil prices to surge toward the $40 a barrel for Brent crude before assuming a declining trend in the second half of the year. The uncertainty associated with the looming war on Iraq has pushed oil prices above $33 a barrel for Brent crude from less than $20 a year ago. On the supply side, there has been a sizeable cutback in petroleum production by Venezuela because of the political crisis there while, on the demand side, the exceptionally cold winter in the US and Northern Europe boosted consumption of heating oil. Furthermore, the US administration has given orders to increase America’s strategic petroleum reserves ú estimated at 700 million barrels ú enough to meet US needs for 63 days. The process of boosting reserves is expected to be completed by early March 2003. The US, which has only 2 percent of world oil reserves imports 55 percent of its total oil consumption needs, with 25 percent of that coming from the Middle East region. The best scenario for Iraq and the region is for the ongoing policy of containment aimed at ending the crisis peacefully to succeed. Under this scenario, the process led by the UN would eventually vindicate Iraq of having weapons of mass destruction, leading to the removal of economic sanctions on Baghdad. With no damage inflicted on Iraq’s oil wells, the country would be able to resume its oil production and execute projects signed with major oil companies to expand the country’s production capacity. Oil prices will lower back to $22 a barrel once the war premium, believed to be around $7 a barrel, is taken out of current prices. Unfortunately, the most likely scenario today is not a peaceful solution but that of a US-led war on Iraq. From what has been leaked so far of the battle plan, American troops hope to descend on Iraq’s oil fields in the early hours of the war to gain control and prevent any sabotage action. Under this scenario, Iraq’s oil production is likely to shut down, perhaps for two to three months, during which the oil fields will be checked for mines and other hazards. During this period, oil prices are likely to peak at $40 a barrel before starting to decline. The prospects of Iraqi crude returning to the market following a short and decisive war and the likelihood that the country will be able to boost production in the coming few years will act as a psychological force on markets, shifting the mood from bullish to bearish. Market participants will start discounting higher future oil production levels, bringing a steep decline in crude prices. Brent crude is forecast to drop below $20 a barrel by summer. The third scenario is that of a war on Iraq dragging on for months. While this scenario is considered by many to be less likely, it should not be ruled out. In this case President Saddam Hussein and his close lieutenants would go underground while troops led by the Republican Guard continue resistance from densely populated sections of Baghdad. Large-scale battles will tail off after a few weeks, but sporadic attacks on enemy forces will continue. Fearful workers and engineers could refuse to operate Iraq’s oil fields, closing them down for several months. In this case oil prices would trade up toward $45 a barrel for Brent crude before falling gradually by year’s end to around $30 a barrel. If troops loyal to the current Iraqi regime decide that it is both a defense and a form of revenge to sabotage Iraq’s oil fields and were able to do so, the world’s oil market could lose a good portion of Iraq’s output. This would put more upward pressure on oil prices, add to the cost of rehabilitating Iraq’s oil production capacity and severely handicap the country’s post-war economic recovery. After the end of the crisis, Iraq is expected to pursue the expansion of its crude oil production in two phases. The first phase, the recovery phase, is likely to last one to two years and would cost up to $5 billion. Major oil service companies would help Iraq restore its production capacity from the current 2.5 million barrel per day (mbpd) average to the 3.5 mbpd level that prevailed in July 1990, just before Iraq invaded Kuwait. The second phase, the development phase, will take much longer and will be aimed at doubling Iraq’s production capacity to 7 mbpd by the year 2010. Here the world’s largest oil companies including those from the US, the UK, France, Russia and Italy, will compete for lucrative contracts with the new government of Iraq. Baghdad’s desperate need for money to rebuild an economy ravaged by 13 years of sanctions and a heavy debt burden of $140 billion will lead it to accept to sign production sharing agreements with the major oil companies. Iraq has an estimated 112.5 billion barrels of proven oil reserves, the world’s second largest after Saudi Arabia. However, only 15 of its 74 discovered oil fields have been developed and just 125 of the 526 known oil deposits have been drilled. This is why the potential for Iraq to almost double its proven reserves is quite high once the entire acreage is mapped. Unlike the Caspian region that saw sizeable increase in crude oil production in the 1990s, Iraq’s crude oil is easier to access and to export. The country has the added advantage of being able to transport much of its output through the Mediterranean sea via pipelines to Turkey, Syria and Lebanon and through the Red Sea via pipelines to Saudi Arabia. Iraq is believed to have contracts worth about $38 billion pending with companies such as Italy’s ENI, UK’s and Holland’s Royal Dutch-Shell, Australia’s BHP, France’s TotalFinaElf, and Russian giant Lukoil. However, no development work has actually started on these deals because of the UN sanctions imposed on Iraq which have also precluded American companies from doing business in the country. France is by far the biggest player. The giant TotalFinaElf has development rights to roughly 25 percent of total Iraqi reserves. In theory, France’s long relationship with Iraq’s national oil company could put the French in a good position for more deals after any war. But at the moment, many French industry officials remain convinced that the Americans will not allow French oil companies to work in Iraq if France fails to support the war effort. That’s why French observers believe that when the final decision is to be taken by the UN, France is unlikely to block it with a veto, in order to protect its future oil interests. Russia is in an equally delicate position as well. While wanting to constrain US power, it is unlikely that Russia will jeopardize lucrative oil contracts signed with Iraq. Baghdad owes Moscow $8 billion in Soviet-era debt. In 1997, Lukoil signed a $3.5 billion, 23-year deal to revive Iraq’s Al-Qurnah field, which has 7.8 billion barrels of proven reserves. But the accord was put on ice after President Putin’s support for the US-led sanctions drive. The short- and medium-term outlook for oil prices and their impact on economic growth prospects both of the region and the world will, therefore, depend on the outcome of the present Iraqi crisis. The worst scenario is clearly the status quo, whereby the crisis continues to drag on for months without a solution, leading to a protracted period of uncertainty associated with higher oil prices and weak world economic growth.

Henry T. Azzam is the Chief Executive Officer at Jordinvest. He wrote this commentary for The Daily Star