www.bayarea.com Posted on Wed, Mar. 19, 2003
By Michael Bazeley Mercury News

Californians who have been reeling from soaring gas prices got a dose of good news Tuesday as crude oil prices -- a key factor in what consumers pay at the pump -- plunged to their lowest level in two months.

That, along with an uptick in gasoline production by California refineries, could finally stabilize and even drive down gasoline prices, analysts said.

The April futures contract for crude oil plunged $3.26 a barrel Tuesday on the New York Mercantile Exchange, closing at $31.67 a barrel. Just a week ago it was trading at nearly $38, a 12-year high.

Today was the biggest drop in oil prices I've seen since I've been here,'' said Mark Mahoney, West Coast markets editor for the Oil Prices Information Service. Our traders haven't seen a day like this since 1991.''

Analysts and traders said President Bush's ultimatum Monday night to Saddam Hussein lifted a blanket of uncertainty that has destabilized the world oil market. Many investors are now anticipating a quick war with Iraq that will not disrupt oil supplies.

I think the traders are pretty confident that starting the war will improve the outlook for oil,'' said Severin Borenstein, director of the University of California Energy Institute in Berkeley. They apparently think this will lead to improved production compared to what they were otherwise expecting.''

Consumers will not see an immediate benefit at gas stations, however. Assuming the lower crude oil prices hold, it could take up to two months for gas prices to drop.

Refineries will need to sell off inventories built up at higher prices. And the cheaper crude oil will take weeks to be shipped and transported to U.S. refiners.

The United States consumes roughly 19.5 million barrels of crude oil a day, more than half of it imported.

In the Bay Area, gas prices have jumped 24 percent since January, from $1.72 a gallon to $2.14 a gallon, according to AAA of Northern California.

Price speculation

Whether prices will drop to last year's levels is not known.

Bay Area oil analyst Norm Higby, who tracks California gas prices, predicted consumers will be paying 40 to 50 cents a gallon less by August. Higby said oil companies have intentionally drawn down inventories to help drive up prices and that a post-war oil glut will force supply levels back up.

The demand will not be there and there will be additional supply,'' Higby said. All the refineries are going to have a glut of supply.''

But others predicted a gradual drop in gas prices, perhaps by just a few cents per gallon initially.

Unfortunately, when oil increases, gas prices skyrocket up, and when it decreases, they feather down,'' said Dennis DeCota, executive director for the California Service Station and Automotive Repair Association, which represents brand and independent gas stations. It will float down if crude continues to drop. . . . We're talking pennies.''

Volatile for months

A couple of factors keep upward pressure on California gas prices, Borenstein said. One is the cost of the ongoing switch from an MTBE fuel to ethanol. The other is a lack of refining capacity in the state, which is forcing California to import more expensive gas from other states.

We're hitting the boundaries of how much you can produce with limited refining capabilities,'' Borenstein said. There's no question a reduction in crude will help gas prices, but I don't think we'll see prices like we saw last year.''

Despite those issues, gasoline production in California increased 18 percent this week, according to the California Energy Commission. The spot market price for wholesale gas dropped a nickel over the weekend.

Traders said world oil prices probably will remain volatile in the coming months. U.S. supplies remain tight, and the Middle East situation is still unpredictable.

Commercial stockpiles of crude in the United States are at 269.8 million barrels, 18 percent below year-ago levels, according to the Energy Department. Supplies have dwindled as a result of high demand for heating oil in the Northeast and fewer imports from Venezuela.

Production surge

But traders are feeling more confident every day about oil supplies. Venezuela, whose oil industry was crippled by a nationwide strike, is now producing enough oil to make up for any Iraqi shortfall. And Saudi Arabia, the world's largest oil producer, reportedly has increased its production by 1 million barrels a day to more than 9 million barrels a day. The Saudis also have nearly 50 million barrels of oil in reserve, the New York Times reported, and could release it if global supplies are disrupted.

Fadel Gheit, senior oil analyst at Fahnestock & Co. in New York, said traders are coming to the conclusion that the world has enough oil to meet demand, even if Iraq's daily oil production is eliminated.

``The war premium is definitely off the oil market,'' Mahoney said.

sg.biz.yahoo.com Thursday March 20, 1:40 AM

WASHINGTON -(Dow Jones)- Improving policies in Latin America should promote a modest recovery in economic growth this year and next, barring a decline in the U.S., the Institute of International Finance said Wednesday.

Excepting a 10% collapse in Venezuela's gross domestic product, Latin America as a region should expand its economy by 2.4% in 2003 and another 3.2% in 2004, the IIF said.

"The commitment to sound macro policies, both monetary and fiscal, coupled with flexible exchange rates have provided some flexibility to respond to a slowing world economy," IIF Managing Director Charles Dallara told reporters.

The group, representing some of the largest banks and financial institutions around the world, also predicted a moderate recovery in net private capital flows to the region to $36 billion in 2003, before rising to $42 billion next year. In 2001, net private flows to Latin America dropped to a historic low of $28 billion.

The forecasts assume the U.S., the largest trading partner for most countries in the region, will experience an average rise in economic growth of about 2.4% for the year, reflecting 1.5% in the first half and almost 4.0% in the second. Oil prices have been penciled in at an average of $28 a barrel for 2003.

Dallara acknowledged the fate of the predictions depends first and foremost on the outcome of an impending U.S. war with Iraq and its impact on oil prices and investor and consumer confidence. "Today is an especially dubious time to be sharing exact forecasts, but the trends are there," he said.

IIF Chief Economist Yusuke Horiguchi reckons a $10 increase in the benchmark average for crude oil shaves 0.6% to 0.7% off of the forecast for U.S. GDP. The effects of higher-than-expected oil prices on the economies of individual Latin American countries differs as many are oil producers. On balance, the effect of higher oil prices is negative for the region because the resulting slower economic activity in some trading partners hurts non-oil exports and offsets revenue gains, the IIF said.

For example, an average oil price of $40 per barrel would raise Mexico's oil earnings by $6.0 billion, but reduces its exports to the U.S. by $9.0 billion, resulting in a net loss, IIF Director for Latin America Fred Jasperson said.

Still, most countries are better positioned to handle the economic uncertainty thanks to more responsible fiscal and monetary policies and flexible exchange rates, Dallara said.

In Brazil, which faced a crisis in market confidence during presidential elections last year, the new government is building credibility and shows a "very real" commitment to pension reform -a key factor in controlling public spending, Dallara said. The IIF predicts 2.0% GDP growth there for 2003.

Mexico has maintained public deficits and is reducing debt as a share of GDP, and is expected to continue a program of tax and energy reforms, the IIF said, predicting growth this year of 2.5%. Peru, the star performer in the region with a forecast for 3.8% GDP growth this year, should continue to do well as long as newly autonomous regional governments don't destabilize public finances.

The IIF sees growth picking up in Colombia to 2.0% this year and then rising to 3.0% next year.

Even Argentina should see a rebound of 3.3% this year, following four years of recession. The outlook there depends on the outcome of presidential elections next month, and whether the winner garners support from the legislative elections in October, the IIF said.

Venezuela, locked in escalating political violence and an imploding economy, is suffering an even greater output drop than the 8.9% contraction in 2002, the IIF said. A possible drop in oil prices following a quick U.S. war with Iraq would only worsen the situation there.

On the whole, the region is improving, the IIF said. External debt is declining to an expected 186% of exports this year from 227% in 1999, according to the IIF. The interest service ratio has fallen to 13% of exports. The trade surplus is expected to exceed $40 billion, or 2.5% of GDP while the current account deficit is dropping to under 1.0% of GDP. Foreign reserves have risen to the highest level ever, the IIF said.

-By Elizabeth Price, Dow Jones Newswires; 202-862-9295; elizabeth.price@dowjones.com

ogj.pennnet.com Marilyn Radler Economics Editor

HOUSTON, Mar. 19 -- The oil market is heading into a period of heightened uncertainty with low stocks and limited spare production capacity, the International Energy Agency warned in its latest Oil Market Report. These factors reduce flexibility and limit the system's ability to respond rapidly to changing circumstances.

The Paris-based agency reported that worldwide crude oil production surged 1.96 million b/d in February. Members of the Organization of Petroleum Exporting Countries added 1.5 million b/d, as output from Venezuela rebounded another 850,000 b/d, and Saudi Arabia increased exports 330,000 b/d. This meant that OPEC spare capacity fell to 1.7 million b/d in February, and Iraqi output for February was 2.49 million b/d

Addressing supply interruptions in light of sparse inventories, IEA commented, "Recent mergers and acquisitions may have increased the ability of refiners to test the limits of indicative minimum operating stocks. And Venezuela may yet surprise us with a sharper than expected increase in supply. But potential political turmoil in Nigeria cannot be forgotten."

The agency noted that some producers have positioned their stocks near water close to consuming markets, while others have land-based inventories capable of supplementing production. If they are available, these stocks could cushion a supply disruption.

Inventories Industry oil stocks in member countries of the Organization for Economic Cooperation and Development are tight and trending around minimum operating levels in key markets, however. Forward demand cover by OECD oil stocks came to 50 days at the end of January, as storage volumes were down 211 million bbl from a year earlier.

Crude stocks declined in the US but held flat in Europe during January. There were few incentives for regional refiners to purchase crude above operating requirements. Heavy refinery maintenance in the US eroded some crude demand, and although strong cracking margins for light sweet crude bolstered throughputs in Europe, backwardation in the paper markets limited inventory holdings, IEA said.

Stocks of gasoline in the OECD grew by 4 million bbl in January. The strongest gains occurred in Europe but were modest in light of waning demand, and exports to the US reached 2 million tonnes. US gasoline stocks slipped marginally despite strong demand.

Distillate stocks in North America plummeted as cold temperatures hit the northeastern US. Meanwhile, gas oil stocks in Europe fell not on domestic demand but on pull from US markets.

Refining margins surge Product price increases outpaced crude oil price gains in February, strengthening margins substantially in the four major refining centers. Cracking margins showed greater improvements than hydroskimming margins in Rotterdam, the Mediterranean, and Singapore.

Cracking margins for both Brent and West Texas Intermediate crude increased on the US Gulf Coast. The monthly gains in average margins hide intra-month fluctuations, though. IEA reported that the US Gulf Coast cracking margin for WTI during February averaged $4.54/bbl, up from $1.93/bbl a month earlier. From late January through the second week of February, the margin improved dramatically and then fell steeply for 2 weeks before rising sharply at the end of the month. The poor mid-February margins rebounded as key product price gains—in heating oil and jet fuel—surpassed crude oil price gains at the end of the month.

Contact Marilyn Radler at Marilynr@ogjonline.com.

www.mtdemocrat.com By JONATHAN SCHWARZBERG Staff writer

The gas supply right now may be as tight as electricity was during the peak of the electricity crisis in California.

Bill Keese, chairman of the California Energy Commission, told the El Dorado Irrigation District board that during the energy crisis the power from a 21-megawatt power facility like the Akin Powerhouse could have had an effect on the price of electricity.

Things may be the same way with gasoline right now.

"We are so strapped right now that anybody could (affect the market)," Keese said.

Keese likened the current crisis to a kind of "perfect storm" that has been created by a variety of circumstances. The impending war in Iraq has caused oil supply problems from the Middle East. A strike in Venezuela has stopped oil coming from that country.

With tight supplies, the market can become open to manipulation. So Gov. Gray Davis has charged the Energy Commission with investigating the price of gas. Keese said he will present his report to the governor on March 28.

"Is gouging occurring?" Keese asked. "I don't know."

But Keese said the commission is looking to see whether gas prices are fair. He said when supplies are tight it is difficult to determine whether prices are being manipulated.

Another "perfect storm" hit the state of California with a shock about two years ago with the electricity crisis. This storm came to a head in 2001 when rolling blackouts were experienced in El Dorado County and across the state.

In the same way that California is experiencing a lack of gas supply this year, the state faced a lack of electricity. California usually gets electricity during summer from hydroelectric facilities in Washington state and Canada. But when these areas couldn't produce electricity for California, the state was in trouble.

"They had a drought," Keese said. "We had high temperatures. We had power plants out."

California saw a power supply boon in the 1980s with nuclear power plants and hydroelectric facilities being built.

"We built so much in the '80s that we entered the '90s with a big surplus," Keese said.

So California built no major power plants in the 1990s. Basic supply and demand pushed electricity prices from $30 per megawatt hour to about $300 per megawatt hour at the highest. Since that time, California has locked in prices of between $50 and $60 with long-term contracts.

These contracts have leveled things out for now, but Keese said the state needs to build at least two large power plants per year in order to keep up with demand.

But another problem may be looming over the horizon.

All the proposed power plants will run on natural gas. This is the fuel of choice because it is clean-burning, but natural gas supplies are getting tight, too.

California produces only about 10 percent of its natural gas. The rest is imported from other parts of the country. Fortunately, California is at the end of the road for much of the piped natural gas. This means California can store, and does store, a lot of natural gas.

But more natural gas will be necessary. So companies throughout the state are looking for ways to import more gas.

Keese said one of the most promising techniques for bring natural gas in could be LNG, liquid natural gas. It is possible to take trapped natural gas and convert it to a liquid form so it can be transported more easily.

This form of gas can be obtained for about 50 cents per million BTU (British Thermal Units). Transportation costs drive this price up to about $3.80, but that is still less expensive than the $5 price the state faces right now.

California has been forced to pay these high prices due to the hard winter in the Northeast. Some states are paying over $9 per million BTU, taking most of the natural gas from Texas.

"As soon as they're willing to pay $9, it's not going to come here," Keese said.

So the market for natural gas remains unstable, which affects the electricity market. Meanwhile the oil market is bouncing around, and two "perfect storms" travel dangerously close to each other.

Jonathan Schwarzberg can be reached by e-mail at jschwarzberg@mtdemocrat.net.

www.eurekalert.org Public release date: 19-Mar-2003 Contact: Sue Toye sue.toye@utoronto.ca 416-978-4289 University of Toronto

"One in three of the world's population suffers from anemia so this has tremendous economic consequences," says Sue Horton, a University of Toronto economics professor and lead author of the study, The Economics of Iron Deficiency. The economic loss due to iron deficiency in South Asia, alone, is staggering: close to $4.2 billion (US) is lost annually in Bangladesh, India, Sri Lanka and Pakistan. Adults who lack sufficient iron in their diets are more lethargic which leads to lower productivity, while the motor and cognitive development of small children is also impaired.

Horton and co-author Jay Ross, an epidemiologist from the non-profit organization Academy for Educational Development, calculated the economic impact of iron deficiencies in 10 developing countries in South Asia, Central America, Africa and the Middle East. They found that, on average, a country loses 0.6 per cent of its gross domestic product (GDP) due to physical productivity losses from adults lacking iron. When learning and motor impairments in anemic children are added, the figure rises dramatically to four per cent of its GDP. "A loss of four per cent of GDP even in poor countries translates into billions of dollars lost," says Horton.

Horton says iron fortification is extremely important and inexpensive. For example, it costs only 12 cents (US) per person per year to fortify wheat flour in Venezuela. The payback is tremendous for a country's economy. "With every dollar you invest, you receive $36 back in physical and cognitive productivity. Those are huge returns."

The study, funded by Micronutrient Initiative, was published online in the February issue of the journal Food Policy.

CONTACT: Professor Sue Horton, Munk Centre for International Studies, 416-287-7129, 416-946-8947, horton@chass.utoronto.ca or Sue Toye, U of T public affairs, 416-978-4289, sue.toye@utoronto.ca