www.azcentral.com Max Jarman The Arizona Republic Mar. 20, 2003 12:00 AM

Arizona's gas prices are the third-highest in the nation as the price of unleaded regular gas topped $2 per gallon in many parts of the Valley.

The price increase come despite steady declines in wholesale prices for both crude oil and gasoline.

Valley retail prices could come down after April 1, when Phoenix-area gas stations switch over to a new fuel mix, the drop could be minimal. But Laura Rightenburg, a spokeswoman for AAA Arizona, explained Wednesday that prices tend to rise in the summer due to increased demand, and that many of the factors affecting current prices, such as low refinery output, relatively high crude oil prices and strikes in Venezuela, are expected to linger.

"I don't see it (gasoline) going below $1.75 for the foreseeable future," she said.

Rightenburg said the record high prices are prompting consumers to limit driving and take shorter trips.

"Gas prices strike an emotional cord," she said. "People are fearful."

But, Rightenburg said, she doesn't expect many people will cancel their summer vacation plans because of the high prices.

The prices also are cutting into business profits. Jerry Garner, a Gilbert farmer, said he is being hurt by the rising price of the diesel fuel his farm equipment burns and by fertilizer prices that have risen with the price of natural gas used in its production.

Statewide, AAA pegged the average price of unleaded regular at $1.92 per gallon, the third-highest in the nation. Only California at $2.18 and Nevada at $2.02 were higher. Arizona's statewide price was 20 cents per gallon higher than the national average of $1.72, according to AAA.

"My eyebrows even went up, and I do this every week," said Rightenburg, who prepares AAA's weekly gas price survey.

In metropolitan Phoenix, a shortage of the special fuel that must be burned until April 1 is pushing prices up even higher.

In Maricopa County, the average price of unleaded regular was $1.995 per gallon, up 1.4 cents from the day before and $41.3 cents from a month ago. But in Phoenix, the average price was $2 per gallon, and in Scottsdale, motorists were paying $2.03.

That compares with $1.88 in Flagstaff and $1.86 in Tucson.

Meanwhile, the price of crude oil, the primary ingredient in gasoline, dropped below $30 per barrel Wednesday for the first time in three months.

"The war premium that we built in is gone," said Tom Bentz, an oil broker at BNP Paribas Commodity Futures Inc. in New York.

Crude oil for April delivery fell $1.79, or 5.7 percent, to $29.88 a barrel on the New York Mercantile Exchange. It was the lowest closing price since Dec. 13, when prices last settled below $30 a barrel.

New York prices peaked at a record $41.15 a barrel in October 1990 after Iraq invaded Kuwait, cutting exports from the two nations.

Oil then plunged by a third on Jan. 17, 1991, after U.S.- led forces began their air attack on Iraq, reducing Iraq's threat to neighboring oil producers. The high this year was $39.99 a barrel.

"The large speculators are continuing to exit the oil market," said Ed Silliere, vice president of risk management at Energy Merchant LLC in New York.

"They now believe the recent bull market is over."

Future prices for refined unleaded gasoline also have dropped. Gas for April delivery sold for 94 cents a gallon on the New York Mercantile Exchange on Wednesday, down from a March 7 high of $1.16.

But Rightenburg explained that many of those supplies are not in the United States, which is why retail pump prices continue to rise, while wholesale prices fall.

"There's plenty of crude oil. It's just not here," she said.

www.sfgate.com Wednesday, March 19, 2003
(03-19) 21:41 PST (AP) -- JORGE RUEDA Associated Press Writer

CARACAS, Venezuela (AP) -- Venezuela insists it will be a reliable wartime supplier of oil to the United States despite sometimes testy relations and a slow recovery from a two-month oil industry strike.

"We are and will continue to be the most secure supplier of oil to the United States," Vice President Jose Vicente Rangel said this week.

His pledge came despite Washington's recent criticism of President Hugo Chavez for arresting strike leaders and obstructing efforts to hold early elections. Chavez told Washington to keep out of Venezuelan affairs.

Others question how soon Chavez's government can stabilize exports after firing nearly half of the state owned oil monopoly's 40,000 people.

Some customers complain they've had trouble contracting tanker shipments with new personnel. The government isn't releasing export figures. Pre-strike exports averaged 2.5 million barrels a day -- including 1.5 million barrels a day to the United States.

"For the first time in our history, shipping crude to the United States in time of war isn't guaranteed because of Venezuela's internal crisis," argued Alberto Quiros Corradi, a former president of Shell de Venezuela.

U.S. Energy Secretary Spencer Abraham has said it could take at least two months before Venezuelan exports stabilize. While its crude quality is lower than many Middle Eastern grades, Venezuela can ship quickly to the United States compared to 40-day tanker shipments from the Middle East.

Market analysts disagree whether war in Iraq will increase or depress prices, disrupt Middle East production or affect low U.S. inventories. Venezuela traditionally has banked on price rises to boost its oil-dependent economy.

Venezuela's opposition, including nearly all oil workers, went on strike Dec. 4 to protest Chavez's handling of the economy and alleged rights abuses and to demand early elections.

Chavez, a former army officer who led a failed coup bid in 1992, was elected president in 1998 and re-elected in 2000 to a six-year term.

The strike failed. Chavez's government claims it has already surpassed its OPEC production quota of 2.8 million barrels a day and can push it to 4 million barrels by April if a protracted war increases prices.

Fired oil executives say production is closer to 2.4 million barrels. Some analysts, meanwhile, said at an OPEC meeting last week they doubted Venezuela's production recovered so quickly after a low of 150,000 barrels during the strike.

Roger Diwan, managing director of markets at Washington-based PFC Energy, estimates Venezuela is exporting 1.8 million barrels a day and producing 2.4 million barrels a day.

"They've done a good job. They've surprised a lot of people," Diwan said. "I never thought they would get up to this level."

Venezuela's ties with Washington have centered on oil since 1914, when the first rig tapped what proved to be the largest reserves outside the Middle East.

Developed in large part with American capital, the oil industry met U.S. needs in both World Wars, the 1973 Arab oil embargo and the 1991 Persian Gulf War. It sided with U.S. interests despite being a founding member of the Organization of Petroleum Exporting Countries and nationalizing the oil industry in 1976.

Chavez, for his part, has been uncharacteristically quiet about the Iraqi crisis. He has concentrated on consolidating control after the nationwide strike, which cost Venezuela at least $6 billion.

In 2000, Chavez irritated the United States by becoming the first head of state to visit Iraq after the 1991 Persian Gulf War. He offered Saddam Hussein his support for ending U.N. sanctions against Iraq.

Oil is key to Chavez's presidency, generating 80 percent of Venezuela's export earnings and a third of its $100 billion gross domestic product. Venezuela's economy is seen contracting by at least 15 percent in 2003, and a wartime spike in oil prices could provide relief.

A price crash will hurt: Venezuela loses $1 billion per year for each $1 drop in the barrel price of oil.

goerie.com By BRUCE STANLEY AP Business Writer

LONDON (AP) - Iraqi troops needed just a few days and some plastic explosives to destroy more than 700 wellheads and turn Kuwait's oil fields into a desert inferno.

Fears are growing that Saddam Hussein might have organized a much more meticulous sabotage of Iraq's own oil fields, in a scorched-earth tactic that could cripple Iraqi production.

The oil industry has buzzed with rumors in recent weeks that Iraqis are rigging their wells with explosives in the hope of slowing a U.S.-led attack and making the country's oil wealth worthless for any new government. A loss of oil from Iraq _ home to the world's second-largest oil reserves _ could crimp supplies for importing countries, including the United States, which depends on Iraq for 2 percent of its imported crude.

Oil exports are also a major source of the money that would be needed to pay for Iraq's reconstruction after a war. Due to their strategic importance, the U.S. Defense Department says it would try to secure Iraq's oil fields quickly to prevent forces loyal to the Iraqi president from damaging them.

"We can confirm reports that (Saddam) has taken measures to booby trap oil wells by wiring the wells so that one person can blow them up," said Defense Department spokeswoman Megan Fox.

"If the worst happens and he does detonate something that causes the oil wells to catch fire, we'll do everything we can. Those assets belong to the Iraqi people, and as much as possible we'd like to keep them intact," she said.

Conventional explosives attached to wellheads and other vital facilities could halt production at any of Iraq's 1,685 wells. With more than twice as many oil wells as Kuwait, Iraq could suffer an even greater economic and environmental disaster.

When Iraqi troops retreated from Kuwait in February 1991, they attached plastic explosives to wellheads _ clusters of pipes and valves protruding from underground wells _ and piled sandbags against them to direct the force of the explosions for maximum effect.

The result was Dante-esque geysers of burning crude at 603 wells and serious damage at more than 100 others. Teams of firefighters from the United States, Canada and eight other countries worked from April until November of that year to douse the last flames.

Most of the teams used seawater pumped through Kuwait's empty oil pipelines to battle the fires. The heat was so intense, at more than 2,000 degrees Fahrenheit (1,093 degrees Celsius), that water sometimes continued bubbling on the ground for two days afterward, said Mark Badick of Safety Boss, Inc.

"We've had fire helmets melt on our heads," said Badick, whose Calgary-based firm put out 180 of the Kuwaiti well fires.

Firefighters from Hungary had a different technique, using two jet engines mounted horizontally on a tank chassis _ a homemade vehicle they called "Big Wind" _ to blast flame-retardant foam.

It took Kuwait more than two years and $50 billion to restore its oil output to pre-Gulf War levels. Iraq, if it sabotaged its oil fields, could take longer and cost much more.

Iraq's fields and pipelines are badly run-down after 12 years of U.N. economic sanctions. Its fields are also much farther from the ocean than those in Kuwait, so firefighters might be unable to pump seawater to tackle burning wells there.

Destruction could be especially bad if Iraqis set off explosives underground, deep within the well shafts themselves. If that happened, firefighters would have to drill a new "relief well" and pump a mixture of sand, gel and mud into each damaged shaft to try to plug it up and stop the blowout.

"It's a long, arduous process," Badick said. Whereas he and his crews put out as many as five fires a day in Kuwait, cleaning up after a single underground explosion can take two months.

Manouchehr Takin, an analyst at the Center for Global Energy Studies, said he doubts that Saddam would go so far as to place explosives 100 meters (yards) into well shafts.

"I'm not sure there are enough engineers and rig operators in Iraq to do this kind of work," he said.

Even if the Iraqis did booby-trap their oil fields, Takin argued that Saudi Arabia, Venezuela and other OPEC member countries could ramp up their production to offset Iraq's 2 million barrels a day in exports.

Saudi Arabia, which has the world's largest crude reserves, has indicated repeatedly that it would boost its output to keep supplies flowing. Also, the United States and other oil importing nations could tap into their 4 billion barrels in strategic petroleum reserves, if necessary, to cover a shortfall.

Brown & Root Services of Houston has drawn up a plan for the U.S. Defense Department for containing and assessing any damage to Iraqi oil installations. The Pentagon has invited companies to express interest in this possible work but has yet to award any contracts.

The challenge for such companies would multiply if Iraq used chemical, biological or radioactive material to sabotage its oil fields.

"That's a whole new ball game," said Peter Gignoux, head of the oil desk at Salomon Smith Barney.

Such a nightmare scenario gives pause even to well-fire veterans like Badick.

Special suits designed to protect a wearer against biological or chemical agents would disintegrate in the heat of a burning well. Firefighters might have no choice but to wait until the fires burn themselves out.

www.ctv.ca Canadian Press

CALGARY — With war being waged half way around the world, perhaps the first impact of the Iraq conflict for most North Americans will be when they pull into their neighbourhood gas stations.

Thursday's attack on Iraq by U.S. and British military forces could put potentially severe upward pressures on the global price of oil. And that directly affects the cost of gasoline, home heating fuel and other sources of energy.

Many factors including the length and severity of the war -- and whether Iraqi oilfields are destroyed -- will dictate how high the price of oil will eventually rise.

In recent weeks traders pushhed crude prices to nearly $40 US a barrel, mirroring levels seen during the Gulf crisis of the early 1990s. But in recent days prices dropped to the low $30s and below amid speculation the war against Iraq will end quickly, with limited disruption to Persian Gulf oil shipments.

At the beginning of the last Gulf war, oil soared to more than $40 US a barrel. Given inflation, that would equate to about $50 US today.

Using the rough calculation that each $1 US rise in the price of crude increased Canadian gasoline prices at the pump by about one cent, $50 oil could send pump prices jumping by 10-13 cents in the short term.

But Vince Lauerman, a global energy strategist with the Canadian Energy Research Institute in Calgary, cautions that the price of oil might react differently during this war.

"It was a pretty soft market going into that last war, but now the market is extremely tight in terms of stocks,'' said Lauerman.

Tight global oil supplies will indeed be a major factor.

A recent report from the U.S. Energy Department report suggested American inventories were 16 per cent lower than a year ago and nearing a 28-year low.

And even though Iraq produces only about three per cent of world supply, it is now an open question as to whether the Organization of Petroleum Exporting Countries has enough spare capacity to make up for Iraqi production, let alone other potential disruptions from neighbouring states like Kuwait.

Though non-OPEC countries like Russia and Canada have been increasing their oil production yearly, Lauerman says they generally have no spare capacity and no way to turn on the taps harder at times of need.

Suncor Energy, one of the main producers in Canada's oilsands in northern Alberta, agrees.

"We are at production capacity at over 200,000 barrels per day,'' says spokeswoman Darlene Crowell recently. "We're not like a conventional oil producer who can ramp up more wells in a heightened environment.''

Angus McPhail, an analyst at ING Financial Markets in Edinburgh, Scotland, says he believes markets would be awash in crude after a swift war, particularly if Venezuela continues to recover from an oil industry strike and other members of the Organization of Petroleum Exporting Countries keep breaking their output quotas. For the second half of the year, ING Financial Markets foresees an average Brent crude price of $18.50 US a barrel.

"We are adamant that oil prices will fall,'' McPhail said.

Chris Heggtveit, a federal Finance Department official, says there are too many variables that could come into play to determine the economic cost of the war and high oil prices.

Not only are complex Middle East geopolitical issues at play, but also other events such as Venezuela's ability to ramp up oil production again after months of internal strife that saw the world's third-largest producer at a standstill.

Still, Heggtveit says Canada should be in a better position than most countries to weather any economic storm.

"It's important to note that Canada's economy would be buffered against serious economic shocks by a number of factors.''

Firstly, Canada's in a better financial position right now than any of the G-7 group of industrialized nations.

Also, because Canada is a net exporter of oil, there will be some offsetting benefits to very high oil prices. The oilpatch will revel in extremely high profits, but federal and provincial governments will also see an bump-up in royalty payments.

As well, Canada is a member of the International Energy Agency, which is a group of 25 countries formed during the energy crisis of the 1970s.

Net oil importing countries in the IEA are required to keep oil stocks of at least 90 days supply and the group has said publicly that it is poised and ready to put additional oil on the market to control price spikes in the event of an Iraq war.

The question really becomes, how long will a spike in oil prices last?

Craig Alexander, a senior economist with the Toronto Dominion Bank, says the price of oil will fall quickly if U.S. military might becomes apparent.

"The financial markets, if they start to see signs that we are getting a very quick military campaign, will immediately start to price in lower prices for crude oil,'' he said.

And while the political ramifications of war in Iraq will likely last a long time, oil markets will likely rebound a lot quicker.

"Iraq will remain in the headlines and news long after the military conflict is over,'' said Alexander. "But those developments are unlikely to be weighing on the price of crude.''

"Once the risk of Iraq affecting its neighbour countries diminishes, and once we know for certain what happens to the Iraqi oilfields, at that point the market will begin looking beyond the conflict.''

As such, the TD Bank is expecting Canada's economic growth to be a roaring four per cent in the second half of this year.

That forecast assumes that the price of oil will be declining substantially and the geopolitical situation becomes a lot more certain than it has been in the past several months.

www.nytimes.com Agence France-Presse By NEELA BANERJEE

As the United States military completed its plans to invade Iraq, disruptions of oil supplies and shipments from the Persian Gulf appeared to have already begun yesterday, industry experts said.

Most notably, exports from Iraq under the United Nations oil-for-food program dwindled to a trickle, a spokesman for the program confirmed, after Kofi Annan, the secretary general, suspended the program within Iraq on Monday. More broadly, some oil tankers scheduled to arrive at other Middle Eastern countries are refusing to enter the Persian Gulf because of security concerns, said Nader Sultan, chief executive of the Kuwait Petroleum Corporation.

"Companies are saying, `Do I send my ships up to the gulf?' " Mr. Sultan said in a phone interview from Kuwait. "And it's not just to Kuwait. Then, the question is up to the captain. Beyond insurance, it's safety, and someone has to make a judgment as to whether it's safe."

He added: "It's already happening, already in the whole of the gulf, there are tankers not going up. Certain shipping companies and certain countries are rethinking that their ships shouldn't come here."

So far, the oil markets have shrugged off concerns that such disruptions could be substantial or last long. At the end of trading on the New York Mercantile Exchange yesterday, oil for May delivery dropped to $29.36 a barrel, while oil for April delivery fell $1.79, to $29.88 a barrel. The price of oil has fallen 21 percent this week on the belief that a war in Iraq will be quick and that there will be little damage to Iraq's oil fields and facilities.

Iraq shipped some of its biggest loads last week, averaging about 1.8 million barrels a day, according to Walid Khadduri, editor in chief of the Middle East Economic Survey and an expert on Iraq's oil industry. But shipments began to shrink considerably by the end of the week, he said.

Now, with the suspension of the oil-for-food program, the loading of oil from the port of Mina al-Bakr, Iraq, on the Persian Gulf has stopped, said Ian Steele, a program spokesman. He said that oil was still flowing from Iraq's northern Kirkuk field to the Turkish port of Ceyhan, where one tanker took on oil Tuesday and another is expected tomorrow.

Oil traders and other industry experts said they expected Iraqi exports to end soon, even from Ceyhan, because the Iraqis would probably shut down most production in preparation for the war. Iraq sends about 35 percent of its oil to the United States, according to PFC Energy, a Washington consulting group, and substantial shipments also go to European oil companies like Eni of Italy and TotalFinaElf of France.

Representatives of the oil industry said the industry would not be badly hurt by the suspension of Iraqi exports because it had already scaled back imports from Iraq over the last year.

A pricing plan for Iraqi oil under the oil-for-food plan proved particularly onerous and discouraged oil sales to many foreigners, oil traders and companies said. Iraq's own decisions throughout the year to increase and decrease exports at will also frustrated buyers. Over the last two months, Iraqi exports have increased as Baghdad compensated for a shortfall of oil from Venezuela because of the general strike there. Still, the growing probability of war over the last few months sent many companies looking elsewhere for more stable oil supplies.

"People have anticipated the possible cutoff of Iraqi oil for months now," said Sara Wachter, a spokeswoman for TotalFinaElf, whose own imports have fallen to "pretty minuscule levels" now from 2.5 million barrels a month in November.

Ms. Wachter said that oil companies operating in OPEC states were producing more oil along with OPEC members, which are producing far above their quotas to make up for the sharp decline in Venezuelan exports and for a possible halt in Iraqi oil. They are also buying up some of the extra OPEC output, she said.

But oil companies buying oil from other Persian Gulf states now face increasingly more expensive insurance rates that are making the journey to that region particularly difficult, industry experts said.

Mr. Sultan of Kuwait Petroleum said that the broad hesitation to bring tankers into the gulf arises from memories of the Iran-Iraq war in the 1980's, when oil tankers were strafed and bombed by the warring sides. He said he thought that this time, as in the first Persian Gulf war, Navy ships might be willing to escort tankers requesting such protection. A spokesman at the Navy Central Command in Bahrain could not be reached for comment.

Moreover, the Persian Gulf countries will be willing to ship the oil themselves to foreign tankers that are reluctant to enter their waters, Mr. Sultan said. "If they're not prepared to come here, we're prepared to take the oil to them," he said. "There won't be a supply disruption. It will be more like a blip in programming. A country like Kuwait, we can make up for a shortfall by delivering oil south of Hormuz. All the logistics are in place. We just need to give the green light to put it all in motion."

Industry experts said that although official Iraqi oil shipments had all but stopped, a chance remained that Iraq could illegally export oil as it has long done, though in far smaller quantities.

Over the last few weeks, oil traders have received reports that five to seven Jordanian-chartered tankers had each loaded about a million barrels of Iraqi crude oil at the Khor al-Amaya port on the Persian Gulf, a transaction and a port outside the purview of the United Nations. The tankers then moved through the gulf without being stopped by the United States-led Multinational Interception Force, which, traders say, routinely searches even small boats.

A spokesman, however, said United States forces do not routinely check ships belonging to allies. He added: "We consider Jordan to be a vital ally in the global war on terrorism."