www.sfgate.com Verne Kopytoff, Vanessa Hua, Chronicle Staff Writers Friday, March 14, 2003

Gov. Gray Davis ordered an investigation Thursday into soaring gasoline, diesel and natural gas prices, questioning whether the oil industry is engaged in illegal profiteering.

Davis asked the California Energy Commission and the state's Public Utilities Commission to examine what he called unexplained price spikes. He suggested that the sticker shock consumers are feeling at the pump and from their heating bills may actually be due to manipulation and a deliberate withholding of supplies.

"The prices are extraordinarily high and don't need to be," Davis said in announcing the investigations at a meeting in Sunnyvale of the Silicon Valley Manufacturing Group, a technology trade association.

The Energy Commission and the PUC are expected to report back to the governor within 15 days. If the commissions discover anything suspicious, the information could be referred to state Attorney General Bill Lockyer for further investigation and possible prosecution.

The governor's call for investigations into fuel costs coincides with gasoline prices hitting all-time highs across the state. A survey this month by the AAA of Northern California shows that the average price for a gallon of regular unleaded Thursday in San Francisco was $2.25, up 71 cents from a year ago.

Natural gas prices are also spiking. An average Pacific Gas and Electric Co.

customer will pay $69.27 in monthly gas bills for March, about 80 percent more than a year ago.

GOUGING DENIALS

John Felmy, an economist for the American Petroleum Institute, the oil industry trade group, rejected the notion that drivers are being gouged.

Increases in gasoline prices, he insisted, are a consequence of a "perfect storm" of factors ranging from tensions in Iraq to a strike by workers in Venezuela to extra costs associated with California's switch of the smog- reducing fuel additive MTBE to ethanol.

"This is the market at work," Felmy said.

His comments echo what natural gas suppliers are saying. They blame the high prices on a cold winter in the East Coast, in addition to the other factors affecting gasoline.

The rising fuel prices in California elicit obvious comparisons to the state's past electricity crisis in 2000 and 2001, after which suppliers and middlemen were found to have manipulated the market. Davis, who faced stinging criticism for his initial handling of that situation, cast himself as an aggressive consumer advocate this time around.

"As we well know from past experience, many energy companies would rather use Enron-style tricks to fuel their bottom lines, than to fuel California homes and businesses," Davis wrote. "These companies have no qualms about using world events, such as the Venezuelan oil strike and an unusually cold winter on the East Coast, to their advantage."

Felmy, the petroleum industry economist, gave a emphatic response: "It's simply disappointing for the governor to say we're using Enron-style tricks. To lump us in with those well-known problems is unacceptable."

Over the years, the oil industry has been investigated by at least two dozen local and state governments related to price manipulation. Felmy said that it has yet to be found guilty.

On Wednesday, the Energy Information Administration, an arm of the federal Department of Energy, said in a weekly report that it believes the current spike is driven by market forces, not gouging.

Sen. Barbara Boxer, D-Calif., has asked the General Accounting Office to look into the price increases. Other senators have asked the Federal Trade Commission for a similar inquiry.

California is among those governments that have pursued the oil industry. In 1999, Lockyer began an investigation of gasoline price spikes after a particularly strong episode here.

He ultimately reported that California was highly susceptible to a volatile fuel market due to a limited number of companies owning the vast majority of refinery capacity.

He also said that the state's requirement for a special clean-burning fuel blend made gas imports difficult to get in times of need.

No criminal or civil charges were brought against the oil industry by Lockyer. The investigation is still open, according to Tom Dresslar, a Lockyer spokesman.

"We'll be happy to take whatever evidence or information the PUC or Energy Commission come up with as part of their investigation," he said. "We haven't found anything yet, but that doesn't mean it doesn't exist."

Davis vetoed a part of a state Senate bill that would have given the attorney general $1 million to investigate the oil industry in 1999.

Gabriel Sanchez, a Davis spokesman, said the governor merely thought the attorney general's office could do the investigation with existing funds.

"He does want to get to the bottom of things," Sanchez insisted. "It shows that even back in '99, he was just trying to be a very good fiscal manager."

Davis has accepted $1.27 million in campaign contributions from the oil and gas industry since 1997, according to the National Institute on Money and State Politics, a political watchdog group. Lockyer has received $279,562 in similar contributions during that time, according to the the institute.

HARD TO PROVE

At the event in Sunnyvale Thursday, Davis acknowledged that proving an antitrust case against the oil industry will be difficult. But he added that an industry's high prices tend to moderate or go down when that industry is being investigated.

"Do I have proof, any evidence?" Davis said of the possibility of fuel prices being manipulated. "No. But as governor, I have an obligation to do something about it. Prices do not just go down, and that is my goal, whatever the reason."

Robert Pringle, head of antitrust matters for the Thelen Reid & Priest law firm in San Francisco, said of Davis' call to arms Thursday: "It's highly political. If the government doesn't do anything, it looks like they're not doing their job."

One wrinkle mentioned by Sandy Litvak, an attorney for the Quinn Emanuel law firm in Los Angeles, is that drivers will have to wait a long time before even a successful case against the oil industry pays off.

"It's too difficult to prove," Litvak said. "And if it was really the case, it would be decided four years from now -- a lot of good that will do."

Still, consumer groups praised the governor.

''Consumers feel bent over the oil barrel," said Charles Langley, who oversees the gasoline price issue for the Utility Consumers' Action Network in San Diego. "People need to know, are we paying a fair price or not?"

WHAT THEY DO

California Energy Commission: Oversees energy planning and policy. Duties include forecasting the state's energy needs, advocating energy efficiency and keeping historical energy data such as prices, production and consumption.

California Public Utilities Commission: Regulates natural gas, electricity, telecommunications and private water suppliers. Sets rates and rules for utilities; monitors complaints.

E-mail the writers at Verne Kopytoff at vkopytoff@sfchronicle.com and Vanessa Hua at vahua@sfchronicle.com.

www.fuelcelltoday.com 13 March 2003 Author: Anonymous Provider: World Refining Originally Published:20021201.

Air Products has signed an agreement to supply the ConocoPhillips Lake Charles, La., refinery with hydrogen. To support ConocoPhillips, and perhaps other refiners in the area, Air Products will build and operate a new hydrogen facility in Lake Charles, with a capacity in excess of 100 million standard cubic feet per day.

Air Products already has signed another long-term hydrogen supply agreement with a major Lake Charles-area refinery. To serve the two customers, Air Products will link its new facility to its existing hydrogen pipeline network, which serves about 40 clients.

To meet ConocoPhillips' hydrogen requirements, pipeline shipments will commence prior to the end of 2002, with the anticipated startup of the new hydrogen production facility by mid-2004. "This supply arrangement is one of over 20 that the company has undertaken for refiners worldwide within the past 10 years," said Jeff Byrne, Air Products' regional vice president for chemical and process industries in North America.

The ConocoPhillips Lake Charles refinery has a capacity of 250,000 bpd, and it processes both heavy high-sulfur crude (mainly from Venezuela and Mexico) and low-sulfur crude. The refinery also produces a full range of fuel products and the feedstock for Excel Paralubes, ConocoPhillips' joint-venture facility that produces high-quality lubricating base oils, representing approximately 10% of U.S. lubricating base oil production.

The new hydrogen facility, a natural gas-based hydrogen steam methane reformer, will be the 19th to be built through the Air Products and Technip-- Coflexip Group Alliance. Technip-Coflexip provides the design and construction expertise for steam methane reformers. Air Products provides the gas cleanup technology and, through its operating network, brings operational and engineering knowledge to "design in" high reliability and efficiency, and then operates and maintains the facilities for customers under long-term agreements.

(C) 2002 World Refining. via ProQuest Information and Learning Company; All Rights Reserved

www.boston.com By Reuters, 3/14/2003

NEW YORK - World oil prices plunged yesterday as wrangling at the United Nations further delayed a vote on a new resolution that could pave the way to war with Iraq.

US light crude dropped $1.82, or 4.8 percent, to $36.01 a barrel. London benchmark Brent crude oil slid $1.44 to $32.47 a barrel.

Oil prices are still up roughly 12 percent this year, underpinned by concerns that a war in Iraq, which itself ships around 4 percent of world oil exports, could upset supplies from other producers in the Middle East.

A report that Japan, Asia's largest oil consumer, plans to sell 300,000 barrels per day from its emergency petroleum reserves if US-led forces invade Iraq added to the day's slide, oil dealers said.

Prices slumped after the White House said diplomatic efforts to secure a consensus at the United Nations on a new resolution on Iraq could spill over into next week. US Secretary of State Colin Powell told a congressional committee there may be no vote at all on the resolution, widely seen as a war trigger - a sign that Washington fears it may not get enough support at the international body.

A German government source said that a compromise on an Iraq proposal was unlikely, even if a vote in the UN Security Council is put off until next week. France has threatened to veto any resolution that would call for military force, and China, Russia, and Germany have all expressed opposition.

Further relief for soaring prices came from an end to freezing US temperatures which have supported heating oil prices at near record levels in recent weeks.

Prices had jumped on Wednesday as a fall in US stocks combined with worries that oil cartel OPEC would not be able to compensate for lost Iraqi exports in event of war.

Latest US data showed crude inventories at a 27-year low. There were also sharp drops in gasoline inventories, which ought to be growing as stockbuilding starts for the summer driving season.

Analysts say core oil stocks are now 89 million barrels below normal. ''Given the reported ramping of OPEC production and the continued recovery of Venezuelan production, the shortfall is shocking,'' SG Securities said in a research note.

The Organization of the Petroleum Exporting Countries has stepped up output this year to cover an outage of crude from Venezuela, where an anti-government strike brought production to little more than a trickle in December and January.

Venezuela, normally the fifth-biggest exporter providing about 13 percent of U.S. oil imports, has increased shipments of crude and oil products though rebel oil workers say production is still less than half of normal levels.

Analysts say timing is now key for the war because oil demand is generally 2 million barrels lower in the second quarter of the year as spring advances and the loss of Iraqi crude would not be as acutely felt. The West's energy watchdog, the International Energy Agency, says the OPEC cartel likely lacks enough capacity to compensate immediately for the loss of Iraqi and Kuwaiti oil.

OPEC, however, has pledged to guarantee supplies should war break out and Saudi oil minister Ali al-Naimi reiterated yesterday OPEC's ability to deliver oil in case of war in Iraq.

Nihon Kezai Shibun reported yesterday that Japan will consider releasing oil with the United States, regardless of what the IEA advises. Japan and the United States are members of the 26-nation IEA, the energy watchdog for industrialized nations that is based in Paris.

The IEA has said that it will allow OPEC to try to cover any shortages in war before it considers, as a last resort, releasing inventories from emergency stockpiles held in consumer nations.

Those reserves, built after the 1974 Arab oil embargo, were last used in the 1990-91 Gulf War after Iraq's invasion of Kuwait.

www.newsday.com By James Toedtman CHIEF ECONOMIC CORRESPONDENT March 14, 2003

Washington - A war against Iraq threatens to undermine an already weakened U.S. economy, especially because of the potential for higher energy costs, what one energy expert calls "the gorilla in the bathtub."

While some past wars boosted business activity, U.S. military action against Iraq and its aftermath is likely to cause more problems for the economy, government officials, business leaders and economists say.

The consensus view is that even under the best-case military scenario - a quick victory - the economy will see rising unemployment, bankruptcies and government deficits.

And then there's the gorilla in the bathtub. That's the phrase used by Kevin Rooney, executive director of the Oil Heat Institute of Long Island, to describe the biggest potential economic danger that war poses: its impact on the cost of energy.

Oil prices already are at 12-year highs, gasoline prices are around $2 a gallon, home heating bills have people gasping in disbelief - and the whole situation could get worse if supplies from the oil-rich Middle East are disrupted. Higher energy costs also raise the specter of overall inflation rearing its ugly head.

That could be the blow that forces consumers to cut way back on their spending. Weary after two years of slack economic growth, depleted retirement accounts and growing job anxiety, consumers would especially feel the pinch of higher energy costs.

"People are already paying the price" of a war, said Larry Goldstein, president of Petroleum Industry Research Foundation.

Some past wars stimulated the economy because the government poured so much money into the effort. That was certainly the case in World War II, when the $2.9 trillion in spending more than doubled the size of the nation's economic output. But spending on the Persian Gulf War amounted to only 1 percent of the gross domestic product, and a war with Iraq could be similar in size.

"We are starting from a weak position," said Sung Won Sohn, chief economist for San Francisco-based Wells Fargo Bank.

The potential price tag may be measured on three levels: the direct war costs, the cost of reconstruction and the impact on the overall economy.

While the Bush administration has been reluctant to publicly discuss the actual cost of a military campaign, private and congressional estimates range between $50 billion and $100 billion, depending on the length and difficulty of the battle. That is comparable to the Gulf War in 1991, except that the costs that time were shared by more than a dozen nations. The United States has committed to assume virtually all costs for any new military action.

But the price tag could be a lot higher, according to Yale economist William Nordhaus, a White House economic adviser during the Carter administration. Estimates are always low, he said, putting the cost at as much as $140 billion.

The cost of stabilizing and rebuilding Iraq is even more uncertain, except that it will be high. "A short war with oil facilities intact would cost a modest amount. But a messy war with torched oil fields would raise the costs dramatically," Sohn said.

A Council on Foreign Relations task force led by former CIA director James Schlesinger and Undersecretary of State Thomas Pickering recommended a combined occupation and nation-building force that would cost up to $20 billion a year for several years. Nordhaus estimated the post-conflict costs at between $100 billion and $600 billion over the next decade. The administration is already mobilizing a UN-based reconstruction effort, which would help deliver the services and share the cost.

"Americans should know the costs are going to be considerable," Schlesinger said this week. His $20 billion-a-year price includes the cost of 75,000 troops and $3 billion in food and medical care.

The consequences of any conflict ricochet like a pinball - in unexpected directions and with uneven impact. The military costs, for example, will feed an already growing federal budget deficit, now pegged at $307 billion.

"That will make deficits larger, so we'll see higher interest rates," said Pearl Kamer, chief economist for the Long Island Association. That in turn could raise borrowing costs for car loans and home mortgages, and make it more expensive for businesses to finance new projects.

Consumer confidence would then suffer even more. "On Long Island, we saw it lag in the last three months of last year, but it's now actually fallen below last year," Kamer said, pointing to sales tax revenues in Nassau and Suffolk that were 2 percent lower this January than last.

Growing defense spending will provide some direct benefit for New York, but the cost-benefit ratio is asymmetrical. For example, the Navy announced a $300 million contract for developing a counterpart to the unmanned Global Hawk surveillance drone now deployed in the Persian Gulf. That has the potential of between 150 and 500 new jobs at Northrop Grumman's Bethpage facility.

But on the same day, the airline industry warned that an Iraq war could reduce passenger traffic by 8 percent, cost the airlines $10.3 billion, eliminate 70,000 jobs, including thousands in New York, and bring the entire industry to the brink of bankruptcy.

Before the start of any military conflict, the price of a barrel of crude oil has risen from $20 to $38 in the past 12 months. That translates to higher heating oil (prices in the metropolitan area have gone from $1.39 to $2.04 per gallon) and jet fuel (61 cents to $1.30).

That affects transportation. A 1-cent increase in the price of jet fuel costs the U.S. airlines $180 million a year, according to the Air Transport Association. Higher energy costs also affect the prices of plastic, fertilizer and food processing. Even construction costs rise, Sohn noted, in part because of the cost of making and then shipping drywall.

Part of the oil problem is based on a national strike in Venezuela that cut daily production there in half.

Further complicating the energy picture is the duration and severity of this winter's cold weather, and the tight supply of natural gas. Most businesses can switch between oil and natural gas, depending on market conditions. When oil prices rose last fall, many opted for natural gas. With depleted natural gas supplies and disrupted oil production, prices of both fuels have skyrocketed.

The global oil supply system is "running on empty," according to a report this week by the International Energy Agency.

That has prompted calls from industry and government leaders to bridge the shortfall by tapping petroleum reserves around the world. Sen. Charles Schumer (D-N.Y.) warned yesterday that the nation risked a recession unless the Bush administration taps the Strategic Petroleum Reserve.

"High prices for crude oil, gasoline, jet fuel and home heating oil are the four horsemen of what will soon be an economic apocalypse if nothing is done," Schumer said.

COST OF CONFLICT

A war against Iraq is expected to cost the federal government $50 billion to $100 billion, about 1 percent of the U.S. gross domestic product. How past wars compare:

NAME OF WAR

Name of War Cost In billions %GDP In 2002 dollars (at the time) Revolutionary War $2.2 63% War of 1812 1.1 13 U.S.-Mexican War 1.6 3 Civil War* 62.0 104 Spanish American War 9.6 3 World War I 190.6 24 World War II 2,896.3 130 Korean War 335.9 15 Vietnam War 494.3 12 Persian Gulf War 76.1 1

• Includes Union and Confederate sides

SOURCE: U.S. Commerce Department

Cost in %

www.ictsd.org

On 6 March, the US State Department announced that it would bar some shrimp imports from Honduras and Venezuela, saying that their exports do not meet US requirements. US law requires countries to use sea turtle "excluder devices" to prevent turtles from drowning in shrimp trawls, or to use other turtle protection programmes or show that their fishing waters do not pose a risk to turtles. Shrimp harvested by "artisanal" and other methods may still be imported. The US said it hopes that the ban against shrimp imports from the two countries will only be temporary, and added that it might send teams to confirm that adequate measures have been taken to protect sea turtles. A WTO panel upheld a US ban on shrimp imports from a group of four Asian countries in 2001 (see BRIDGES Weekly, 23 October 2001).

The harmful effect of fishing on sea turtles made headlines when the leatherback sea turtle -- one of the oldest and widest-ranging marine animals -- was found to be under threat of extinction. Amongst other factors, these turtles are caught by gill nets and long-lines used for fishing tuna and swordfish. The leatherback turtles, which have existed for the last 100 million years, could become extinct within the next 10 to 20 years. In response to this threat, conservationists have begun to put pressure on the international fish markets through consumer information campaigns.

"Turtle hurtles towards extinction," GUARDIAN, 7 March 2003; "US raps Venezuela, Honduras for harming sea turtles," REUTERS, 10 March 2003.