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.

biz.yahoo.com Thursday March 20, 4:50 pm ET

NEW YORK (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 (News - Websites)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 (CLK3) 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.

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 Organization 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.

cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 4:18 PM ET March 20, 2003

NEW YORK (CBS.MW) -- Expectations that the U.S. and allied war against Iraq will be quick with little disruption eventually won the favor of most oil traders Thursday, prompting crude futures to fall for a sixth-straight session back to mid-December levels.

"The feeling is apparently very widespread that the conflict will be resolved quickly and oil will flow freely into the marketplace," Michael Fitzpatrick, an analyst at Fimat USA, told clients Thursday.

During the session, developments in the war took crude prices on a roller coaster ride, with nearly $3 separating the price from its low and its peak.

As many as four oil fires are burning in southern Iraq, U.S. defense officials said Wednesday.

During a press conference, White House spokesman Ari Fleischer said allied forced were confirming the fires at a "small number" of wells, but had no information as to the extent of the damage. See Special Report: America at War.

The news provided oil with a temporary lift, but that soon faded when the number of oil fires was actually smaller than many had anticipated.

"This is really a good sign," said energy analyst Peter Zeihan of Stratfor, an intelligence-consulting group based in Austin, Texas, explaining that the oil market was expecting many more wells to be set on fire, even at the start. Listen to Zeihan's outlook.

He now believes that the wells mentioned in the news are part of the Rumaila oil fields, Iraq's second-largest producing field geographically behind Kirkuk in the north. Rumaila accounts for about half of Iraq's production of around 2.4 million to 2.5 million barrels per day.

There were reports that several hundred of the more than 500 wells in Rumaila were wired together with explosives by the Iraqis and that there was a single switch that would trigger a fire in all of them, he explained.

The news that only a few wells were set on fire indicates that there is no single switch, he said.

On Thursday, April crude closed at $28.61 a barrel, down $1.27 on the New York Mercantile Exchange -- its lowest close since Dec. 13, 2002. The contract, which has been on the decline since March 13, has lost $9.22 in the last six sessions.

Crude for May delivery, which became the front-month contract at the close of the session, fell by $1.24 to $28.12 a barrel. Brent for May delivery closed at $25.50 a barrel on London's International Petroleum Exchange, down $1.25.

Meanwhile, gold for April delivery also closed at its lowest level in three months against the backdrop of war. See Metals Stocks.

"The removal of uncertainty has led to a reduction in the [oil] risk premium by as much as one half" -- but not a single shot needed to be fired for this to happen, said Thorsten Fischer, an oil economist at Economy.com.

"It was enough that the market was convinced that the waiting was going to be over soon," he said. "That is why the actual start of the campaign did not make that big of a difference."

Oil prices have dropped dramatically since the U.S. made its decision to forcibly disarm Iraq, with investors expecting the war "to go well for the U.S., Iraqi oil fields to be preserved and a safer, friendlier oil trade to emerge as a result," said Todd Hultman, president of Dailyfutures.com.

Most oil traders are "acting as if the outcome of the war is in the bag, but clearly it is not -- at least not yet," he said.

What next

Right now, the biggest concern for oil traders will be the condition of the oil fields in Iraq and Kuwait and the flow of oil tankers in the Persian Gulf," said Hultman.

Economy.com's Fischer emphasized that "everything depends on how the campaign proceeds."

Crude prices will continue to fall as long as the war goes according to plan -- "as long as there is no bad news" which could come in the form of an escalation of the conflict either because Saddam attacks Israel or uses biological and chemical weapons, he said.

The war situation would also worsen if Saddam succeeded in destroying oil fields in neighboring countries, Fischer said. "Any of these developments would cause crude prices to reverse course, but most likely only temporarily," he said.

If things went terribly wrong and prices shot up again, the Bush administration would release crude from the Strategic Petroleum Reserve, "dampening further price hikes," he said.

Michael Lynch, president of Strategic Energy & Economic Research (SEER) in Winchester, Mass., pointed out that a release from the Strategic Petroleum Reserve can be "considered 'in the pipeline' right away" because the markets know the details of the amounts, location and delivery of the oil.

How to trade

For now, oil traders need "deep pockets to survive, because there are going to be sharp swings up and down in the next week or two," said SEER's Lynch. "Any given position could be hammered," he said, so "expect margin calls."

There's no sure way of making money, but traders "may try to benefit from the increased volatility, while more conservative people may just want to hedge the price of energy they'll have to pay for their business," Fischer said.

Supplies reassured

With concerns over supplies growing, OPEC and the International Energy Agency reassured the oil market that producers are committed to maintain oil supplies in the event of war-related disruptions.

In a statement from Paris, Claude Mandil, the IEA's executive director, said: "With the initiation of military operations in Iraq we are monitoring developments as they relate to the supply of oil to world markets ... We are determined to promote stability in world oil markets and remain ready to reinforce producers' efforts should the need arise."

OPEC said on Thursday it would make up for any oil shortages from the attack on Iraq, using spare output capacity to ensure continued supply, Reuters reported.

OPEC President Abdullah al-Attiyah of Qatar said he had spoken with all 11 members of the oil cartel following the attack.

Against this backdrop, the Energy Department and American Petroleum Institute both reported Wednesday a rise in crude inventories and a drop in gasoline supplies, but data for distillates were mixed.

Crude inventories, as of the week ended March 14, stand nearly 18 percent below the year-ago level, and distillate and gasoline stocks are 23.5 percent or 7 percent below their year-ago levels, respectively, according to the two reports. See the full story.

Retail gasoline prices slip

Prices for gas at the pump were slightly lower for a second-straight day on average for the nation Thursday, according to AAA's Daily Fuel Gauge Report.

The average price at the pump totaled $1.714 a gallon as of early Thursday, compared with $1.719 on Wednesday. A year ago, prices stood at $1.298 a gallon. The price touched a fresh all-time high Tuesday at $1.722.

Retail prices in California were the highest in the nation, averaging $2.176 a gallon, unchanged from the day before, the AAA's report said.

"Gasoline prices may well reach new record highs if stronger demand coincides with still high prices," said Economy.com's Fischer. They will certainly reach record highs if one of the more pessimistic scenarios plays out in the Gulf and crude prices rise again," he said.

Futures prices appeared to be unfazed by an unconfirmed report that terrorists are mulling an attack on key U.S. refineries in the Caribbean.

The Oil Price Information Service, a provider of gasoline commentary, said the U.S. believes terrorists could be planning an attack on Amerada Hess's (AHC: news, chart, profile) 495,000 barrel-per-day Hess refinery in the Virgin Islands and El Paso's (EP: news, chart, profile) 250,000 barrel-per-day facility in Aruba.

The report is an exclusive to OPIS and its newsletter Oil Express. A call to Amerada Hess seeking comment wasn't returned. An El Paso spokesperson said "all of our facilities are operating at a high state of alert. We employ a multitude of security measures and [are] continually updating and enhancing them and do not discuss specific security measures."

In the futures market, April gasoline prices closed at 90.96 cents a gallon, down 3.29 cents on the session.

Also on Nymex, April heating oil fell by 1.17 cents to 82.44 cents a gallon.

"Refined products will follow crude prices, but strong seasonal demand for gasoline will support gasoline, whereas demand for distillates will continue to fall," said Fischer.

Natural gas climbs

April natural gas climbed by 2.8 cents to close at $5.306 per million British thermal units after a weekly update on U.S. supplies revealed a decline within market expectations.

The Energy Department said natural-gas inventories fell by 85 billion cubic feet during the week ended March 14.

Total inventories of 636 billion cubic feet are now 1 trillion cubic feet less than the level of a year ago and 646 billion cubic feet below the five-year average.

Total stocks are at "a new all-time spring low," said IFR Pegasus senior analyst Tim Evans. But "mixed weather and fickle petroleum may continue to hamper uptrend development."

Fimat expected U.S. gas in storage to have been drawn down by 88 billion cubic feet last week.

In the equities arena, the Philadelphia Oil Service Index ($OSX: news, chart, profile) traded higher Thursday. See Energy Stocks.

The Reuters/CRB Index -- a broad-based measure of the commodity futures market -- closed at 234.2, down 0.4 percent amid weakness in gold and energy futures markets.

Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco. Dallas-based reporter Lisa Sanders contributed to this report.

www.whittierdailynews.com By Ben Baeder , Staff Writer

The famed marriage between Southern Californians and their cars is in a rocky spot right now.

As prices for regular gasoline in the area have climbed to an average of $2.16 per gallon, Southern Californians are walking away from their automobiles and crowding onto buses and trains in record numbers, according to officials from the Los Angeles County Metropolitan Transportation Authority.

"We've had an increase of 75,000 riders per day, on average, since early February,' said MTA spokesman Dave Sotero. "Our buses are jampacked.'

Also, ridership on the MTA's buses and light-rail trains has risen to 1.2 million from 1.1 million in less than two months, Sotero added.

Metrolink trains have seen a similar increase in ridership.

Janice England of Cerritos catches the 8:09 a.m. Metrolink train from the Norwalk/Santa Fe Springs station to her job at the Archdiocese of Los Angeles in downtown L.A.

"Last week, I couldn't find a parking spot (at the Santa Fe Springs/Norwalk station),' she said while waiting for her train on Monday. "I got in my car and left.'

England and other commuters won't find parking relief any time soon.

There is no end in sight to the rising price of gasoline, according to the Web site Oil and Gas Investor.com .

Analysts on the site say turmoil in oil-rich Venezuela and the looming war with Iraq will cause gas prices to rise.

According to Jeff Springs of the Southern California Auto Club, gas prices started rising rapidly in January, when the average gas price was about $1.50 per gallon.

Since then, gas prices have steadily increased at a rate of about 6 cents per week, he said.

Spring also said it is impossible to predict how high the prices will go. However, "one thing we are seeing is the price is going up a little more slowly lately,' he said.

Transportation officials say their services offer a cheap, fast alternative to automobile travel.

On Tuesday, the MTA's 720 Metro Rapid bus line from the Montebello/Commerce Metrolink station to downtown Los Angeles which is a 25-minute, $1.35 trip was standing- room only.

The Metro Rapid buses, which send out signals that cause traffic lights to change, are one of the MTA's most popular services.

Shane Rhody, 40, takes the Metro Rapid from his home in Los Angeles to work at the Oroweat baking plant in Montebello.

"I love this bus,' he said. "It definitely hauls butt. These drivers can really move through the traffic.'

Duane Dennis, who lives near Whittwood Mall in Whittier and takes the Metrolink from Santa Fe Springs to his child-care job in Los Angeles, says he has used the train for three years.

The trip is $9, and, since Dennis buys 10 trips at a time, he gets a discount, which ends up costing him $8 per trip. The trip to Union Station in Los Angeles takes about 35 minutes.

Even if gas was cheap, Dennis would still take the train, he said.

"I hate going through all that traffic,' he said while riding the train on Monday as he read a special newspaper section about the upcoming college basketball playoffs. "I do it for peace of mind.'

Pico Rivera Mayor Bea Proo, who sits on the MTA board of directors, said public transportation agencies now face the challenge of keeping their new customers satisfied and coming back for more.

Right now, there are four Metro Rapid lines, but the MTA has plans to add 23 more within the next five years, she said.

She also added that several new Metro Rapid lines will be opened up in Whittier and Pico Rivera soon.

"What our interest is right now is to see how many of these new riders we can retain,' she said. "And we might be seeing a new audience of business people. We have to adjust our service a little while keeping our current riders happy.'

But, as needs increase, funding for public transportation has stalled because politicians are more concerned about funding the potential war with Iraq, Proo said.

She lobbied politicians in Washington, D.C., last week for more federal dollars for area transportation. Proo got a lot of encouragement but not a single promise of transportation money, she said.

In Santa Fe Springs, city officials say they got transportation funds just in time.

The city plans, in cooperation with Norwalk, to spend $1.5 million of federal money to build more parking at the Metrolink station, said Marina Sueiro, the Santa Fe Springs director of intergovernmental relations.

"We will be taking bids in the next few weeks from firms that will make plans for a parking master plan,' she said.

Other agencies are planning on carrying out similar capital-improvement programs, officials said.

In the past, however, ridership gains were lost when gas prices went back down to normal, said Francisco Oaxaca, spokesman for Metrolink.

But with gas prices expected to rise even more, the MTA is gearing up for more riders and just ordered a new round of passenger cars.

"We've never experienced anything like this before,' Oaxaca said of the 10-year-old train company. "We are really in uncharted territory.'

-- Ben Baeder can be reached at (562) 698-0955, Ext. 3024, or by e-mail at ben.baeder@sgvn.com .

www.iisd.ca

A Reporting Service for Environment and Development Negotiations

Published by the International Institute for Sustainable Development (IISD)

Vol. 09 No. 255 Thursday, 20 March 2003