www.kansas.com Posted on Thu, Mar. 20, 2003
BY DAN PILLER Fort Worth Star-Telegram

As zero hour approached Wednesday for the beginning of the second Gulf War, energy traders worked on the ironic realization that the world suddenly had a glut of oil and that prices are likely to fall.

Futures prices have dropped from a 12-year high of $37.10 a barrel just a week ago to close Wednesday at $29.88 for April delivery, just hours before the expiration of President Bush's ultimatum to Saddam Hussein that would trigger the onset of hostilities in Iraq.

Futures prices tend to run three to four weeks ahead of the pump prices. Whether that declining price holds long enough for motorists to benefit remains to be seen. But traders in New York and London obviously had separated their markets from the war anxieties of the region that holds the world's largest oil reserves.

"The world is beginning to realize that there is a bit of a glut of oil," said Leo Drollas, chief economist for the Center for Global Energy Studies in London.

In recent days some traders have begun to talk of prices dipping back into the low to mid-$20s price range from the $35 a barrel average that has held since Bush began his pressure campaign late last year against Saddam Hussein.

Such a decline would mirror the experience of 12 years ago when Operation Desert Storm was unleashed. Despite fears of disruption of Middle East oil shipments, Americans actually saw fuel prices decline by a third through early 1991 even before their armies stormed to a quick victory in Kuwait.

Today's market predictions of lower prices are based on the continued promises of Organization of Petroleum Exporting Countries producers to cover any losses to Iraqi production and ship to the United States and Western Europe the oil necessary to keep those economies going.

OPEC may have already primed the pump. Reports have surfaced this week of as much as 50 million barrels of oil at sea on tankers, a greater-than-normal volume in the pipeline.

Worldwide daily production now is 77 million barrels. U.S. producers pump about 7 million barrels a day. The United States imports the other 60 percent of the 19.5 million barrels it consumes daily.

OPEC also knows that the U.S. Strategic Petroleum Reserve is brimming with a four-month supply of oil, analysts said. It also has ready access to more than 5 million barrels daily from Canada, Venezuela and Mexico. OPEC can ill afford to blow off the American market as it did with two embargoes in the 1970s.

Since then, the United States created the Strategic Petroleum Reserve embraced more fuel-efficient automobiles and refocused the 60 percent of its daily oil supply that it received from the Middle East to more stable sources in this hemisphere.

washingtontimes.com By Tim Lemke THE WASHINGTON TIMES

 The United States must lessen its dependency on Middle Eastern oil and expand its trade with non-OPEC nations, officials and analysts said yesterday as the nation headed into war with Iraq. 
 Sen. Conrad Burns, Montana Republican and chairman of the Senate Appropriations interior subcommittee, said the United States should turn to Russia, other former Soviet republics and West Africa for oil, and insisted that the country's reliance on oil from "rogue" nations such as Iran and Iraq threatens its security.
 "The attack on [September 11] by Islamic extremists should have been a wake-up call to the nation that our vital security interests are threatened by our increased dependence on Middle East oil imports," Mr. Burns said. "I am sorry to say that our nation still slumbers."
 The price of a barrel of crude oil fell nearly $2 yesterday to $29.88. Prices had been as high as $37 earlier this week, but began tumbling after President Bush said Monday that a war with Iraq was nearly certain.
 Mr. Burns made his comments in a speech at the Heritage Foundation, along with Roger Robinson, an energy consultant and chairman of the William J. Casey Institute, and Ariel Cohen, a research fellow at the Heritage Foundation. 
 The Energy Information Administration estimates that the region around the Caspian Sea <ampersand/>#8212; bounded by Russia, Azerbaijan, Iran, Turkmenistan and Kazakhstan <ampersand/>#8212; contains about 10 billion barrels of oil in proven reserves, and produces about 1.3 million barrels per day.
 Analysts said imports from that region can increase, particularly after the completion of the Baku-Tbilisi-Cehan pipeline that will stretch 1,038 miles from Azerbaijan to a Mediterranean seaport off Turkey. 
 Completion of the pipeline is scheduled for 2005.
 Increasing output from countries outside the Middle East would not only improve U.S. security, but also boost energy flow to populous nations such as China and India, Mr. Robinson said. 
 The panel said political changes in many nations would lead to privatization of oil, and therefore, greater production. 
 Mr. Cohen, who has written extensively on the issue of America's need to diversify its sources of oil, said toppling Saddam Hussein in Iraq will lead to increased energy supplies. 
 "I envision an Iraq with a government that allows for private property, that allows privatization, that allows investment," said Mr. Cohen, who estimated that Iraqi oil output would increase threefold under a democratic regime. 
 Mr. Cohen also said a new government in Venezuela, a member of the Organization of the Petroleum Exporting Countries experiencing political instability, would better serve the United States. The United States gets about 10 percent of its oil from Venezuela.

www.alertnet.org 20 Mar 2003 21:47 (Updates prices, paragraph 4)

NEW YORK, March 20 (Reuters) - World oil prices extended a week-long slump to set new three-month lows on Thursday as the United States launched a widening offensive on Iraq and dealers predicted an easy victory for Washington.

Prices swung wildly during the day on reports, denied by Baghdad, that three or four oil wells were on fire in the south of the country.

OPEC exporters have said they could fill any supply gap resulting from the conflict in the oil-rich Gulf, and that markets were already well supplied. The West's energy watchdog, the International Energy Agency (IEA), said it saw no reason to release emergency stocks.

U.S. crude futures for May delivery fell $1.24 to $28.12, touching its lowest price since mid-December. Benchmark Brent crude oil fell $1.25 to $25.50 per barrel in London, after having touched a three-month low of $25.30.

Oil has shed a quarter of its value in the last week on a massive bet by investment funds that the war will end quickly, without causing major damage to oil installations or supply disruptions.

"The war premium is diminishing on a growing certainty that coalition forces will prevail," said Peter Gignoux, head of the London energy desk at Salomon Smith Barney.

Hours after U.S. cruise missiles hit targets in Baghdad, officials in neighboring Kuwait said oil output was normal, despite two Iraqi missiles hitting the north of the country.

Oil tanker traffic from the Gulf, which provides 40 percent of world oil exports, was also running smoothly, shippers said.

Market assumptions of limited damage to oil installations were challenged by earlier reports that three or four oil wells were on fire in southern Iraq, where half the country's oil is produced.

U.S. Defense Secretary Donald Rumsfeld said he had indications Iraq may have set fire to several wells, but Reuters eyewitnesses said there were no signs of fire at Iraqi oilfields close to the border with Kuwait.

Iraq has around 1,100 wells in total, analysts said.

Iraq suspended oil exports from its southern fields earlier this week, when United Nations inspectors left the country. Limited exports continued on Thursday from a pipeline to the Turkish Mediterranean.

OPEC TO FILL SHORTFALL

The Organisation of the Petroleum Exporting Countries has reassured consumers that it was ready to tap its spare capacity to make up for any shortage from Iraq, but said markets were already well supplied.

"We are not thinking of any increase in production," said OPEC President Abdullah al-Attiyah. "Oil prices are heading downwards. This shows there is more oil in the market than the market can absorb."

Saudi Arabia, the world's biggest exporter, said its oilfields and export terminals were running normally and it was ready to pump more oil to stabilize markets.

Riyadh has already ramped up production well beyond nine million barrels daily, above an OPEC quota of eight million.

The IEA said there was no need for industrialized nations of the West to release emergency stocks as it was confident OPEC could cover the shortfall.

"At the precise hour we speak, I think it is not necessary (to release stocks)," IEA executive director Claude Mandil told Reuters. "We had a very strong statement from OPEC, which has said they will ensure any shortfall and we are confident they will do their best."

The IEA, which oversees some four billion barrels of stocks in 26 industrialized countries, said a release would become necessary only in case of a shortage that could not be covered by OPEC.

It also ruled out any unilateral reserves release by any one member, saying key importers the United States, Japan and South Korea all shared its view that a stock draw was not necessary.

www.tuscaloosanews.com By Steve Reeves Staff Writer March 20, 2003

TUSCALOOSA | Baghdad will fall within two to three weeks, and gas prices will remain stable if the war against Iraq goes well.

Those were the opinions expressed by two University of Alabama professors after the opening shots Wednesday night of the U.S.-led campaign to topple Saddam Hussein.

Donald Snow, a UA political science professor and nationally known military expert, said the first hours and days of the U.S. military campaign will be designed to knock out Iraqi communications and rattle that nation’s will to continue fighting.

“This is exactly the way we started Gulf War I," Snow said.

He said an intense bombardment by U.S. and British warplanes can be expected during the next two to three days, an effort he said is meant to shock the Iraqi army into giving up.

“That probably won’t work," Snow said. “Those guys are going to fight. It’s said the Iraqis don’t fight well, but they fight hard."

Snow predicted that Baghdad would fall within two to three weeks, and that would be when the U.S. military will face its biggest challenge.

“There’s going to be continued resistance after the war," he said. “The Iraqis may treat us as liberators the first couple of weeks. But when they realize we’re not leaving, that’s when it gets dicey."

Snow also predicted much higher casualties than in the first war against Iraq, when 148 U.S. troops lost their lives. He said the urban fighting that will likely result from the invasion means a much higher degree of danger for the troops.

“There will absolutely be higher casualties than the first time around," he said.

Peter Clark, a UA chemical engineering professor, said he doesn’t expect the war to result in higher gas prices.

Clark pointed out that oil prices have gone down the last two days and that Venezuela, a major oil supplier, is gearing up its production capacity.

“As long as there’s not damage to the oil fields, or if they somehow manage to block the shipping lanes, I don’t think much is going to happen," Clark said. “If the war goes as it should, gas prices by the summer should start to drift down."

washingtontimes.com March 20, 2003

 As war with Iraq has become more imminent, the price of oil, which hit its recent peak of $39.99 per barrel in intra-day trading late last month, has begun to decline precipitously. Falling Wednesday for the seventh time in the last eight sessions, the New York Mercantile Exchange (Nymex) price for its benchmark sweet, light crude oil for next-month delivery closed at $29.88.
 In recent years, oil prices have become increasingly volatile. Average world oil prices bottomed out in the summer of 1998 at about $10 per barrel. Since February 2002, by which time the price of oil had recovered to nearly $20, the cost of the world's arguably most indispensable commodity had soared by another 100 percent to nearly $40 before beginning its recent decline. Rising oil prices over the past year sent the average U.S. nominal gasoline price to a record $1.73 per gallon recently, reflecting an increase of more than 50 cents per gallon from a year ago. 
 These price run-ups have had their impact. Over the past year, higher energy costs have amounted to about 0.5 percent of gross domestic product (GDP), or more than $50 billion. The increase in gasoline prices, which acts like a tax increase, has diverted billions of consumer dollars away from other spending. Meanwhile, many industrial businesses, unable to pass on their higher energy costs because of weak pricing power, have seen their profits fall. That, in turn, has reduced their ability to make new investments and delayed the arrival of a robust economic recovery. 
 Indisputably, these oil-related cost increases have been steep, and the price levels reached in recent days have been high. Still, some serious perspective is in order. After Iraq had invaded Iran in September 1980, following Iran's oil-market-destabilizing 1979 revolution, some OPEC nations commanded a price of $41 per barrel in late 1980. That price would exceed $85 in today's dollars (after adjusting for inflation). And the $41.15 peak oil price in October 1990, following Iraq's August invasion of Kuwait, would be $56 per barrel measured in today's dollars. Adjusted for inflation, the price of gasoline peaked in 1981, when it would have cost about $2.50 per gallon measure in current dollars. That's nearly 50 percent higher than today's price of $1.73 per gallon. 
 What is certain about future crude prices is their unpredictability and volatility. Equally certain is this fact: Whichever direction the price of oil moves will have a profound impact on the sluggish U.S. and global economies. The International Monetary Fund estimates that each $10 per barrel price increase sustained for a year chops 0.6 percent off global GDP a year later. That rule of thumb essentially works in reverse as well.
 History provides one possible outcome. On Jan. 17, 1991, the first day of trading following the U.S.-led coalition attack on Iraq, the price of oil plunged a record $10.56 per barrel on Nymex, falling below $21.50 <ampersand/>#8212; a price less than the pre-invasion oil price. Shortly, the price fell to $18.
 For numerous reasons, however, such a positive scenario may not be repeated. In the first place, today's market has much less spare-oil capacity. In 1990, unused OPEC capacity exceeded 5 million barrels, more than enough to replace the 4.5 million barrels lost when sanctions closed down Iraqi and Kuwaiti exports. Other suppliers also had unused capacity then. Today, non-OPEC sources are producing at their maximum levels. In OPEC, only Saudi Arabia has any meaningful excess capacity, although how much is open to considerable debate. The Saudis are as secretive about their production levels as they are about their Swiss bank accounts, but it is believed they can increase immediate production by only 500,000 barrels. Perhaps another million barrels per day can come on stream in a few months. That's still below the 2 million barrels per day that Iraq has recently been exporting. When war starts, Kuwait may have to shut down output from its wells near Iraq, removing as much as 800,000 barrels from the market. 
 In addition to strained capacity, oil inventories at refineries are at their lowest levels since 1975. And Japan has shut down 14 of its 17 nuclear plants for safety reasons and has begun using oil to generate electricity in their place. Meanwhile, violence has broken out in Nigeria as its presidential election approaches. And Venezuela remains a wild card. The U.S. Strategic Petroleum Reserve has nearly 600 million barrels (less than 60 days worth of U.S. imports), which can be tapped at the rate of 4.3 million barrels per day. 
 In short, there remains little margin for error this time around. In a worst-case scenario, a terrorist attack could conceivably take out the 5 million barrels Saudi Arabia can export each day from its Ras Taura port. Then, all bets would be off.