OIL AND MONEY

March 19, 2003

Oil prices have tumbled this week, responding to the uncertainty of war. Business correspondent Paul Solman reports on the volatile oil market.

PAUL SOLMAN: Monday morning this week, Colin Powell was about to hold a press conference, Pres. Bush would address the nation at 8:00 P.M. The price of oil, highly volatile in this environment, began the day at about $35.50, a barrel. It closed in on $36 immediately, within sight of its all-time high. ABN AMRO, the huge Dutch bank, trades in the oil market for clients like oil companies and big investors. Our first question to oil analyst Jan Stuart: Mightn't this be like the last gulf war, with prices running up in anticipation of it, only to plunge once it was resolved?

JAN STUART: Back then, we had huge inventories. Prices right before the invasion of Kuwait were $16, $17. Prices before the start of this last crisis starting were already in the high $20s, low $30s. And then you started going into a war scenario.

PAUL SOLMAN: Jan Stuart is a fundamentalist in the economic, not religious, sense. That is, he predicts prices using the fundamental determinants of supply and demand -- like the fact that producers and refiners, who've been running low oil inventories for years in order to save money, have even less oil on hand right now.

JAN STUART: The single largest reason why those inventories are now so low is the political crisis in Venezuela, where in early December the national oil companies sided with the opposition to Pres. Hugo Chavez and paralyzed the Venezuelan oil industry.

PAUL SOLMAN: With far-reaching effects up here in the north as well. The U.S. Imports almost 12 million barrels of the roughly 20 million barrels we consume every day, mainly to make gasoline for transportation. Venezuela provided 15 percent of our imports, up near two million barrels a day, as much as Iraq's total daily output.

SANDY WHITLOCK: Which is why we've seen the rise in gasoline prices and also the rise in heating oil...

PAUL SOLMAN: Broker Sandy Whitlock.

SANDY WHITLOCK: ...Influenced, of course, by weather. So we had what we call the perfect storm happening and throw the war tensions in on top of that and we've had a very volatile, very pricey market.

PAUL SOLMAN: What was striking to us was just how many opinions were moving the price of oil from brokers at this desk alone.

SPOKESMAN: Hey, what's going on?

PAUL SOLMAN: That was Richard Schaffer, head of the oil desk.

SPOKESMAN: We're trading $35.95 right now. $33.60 is the current low. And you got shorts are kind of battling this SPR release headline, you know, concerns that basically saying bush can give the order any time to release from the SPR.

PAUL SOLMAN: The SPR, or "Strategic Petroleum Reserve," created in 1975 in the wake of the first Arab oil embargo. 599 million barrels of oil stockpiled by the U.S. in salt domes off the Gulf Coast, several months worth of imports. The question: If and when it might be pumped, which would dampen any price spike.

PAUL SOLMAN: The broker explains it:

AL ZAPULLA: The major problem with SPR is that it's kind of a one-shot deal, so the government has to be concerned that it's releasing it at the ideal time, because if they release it, people were saying as we approached $40, they were going to release it to kind of help bolster the economy, save the economy.

PAUL SOLMAN: Because that would drive prices down if you suddenly flooded the market with oil.

AL ZAPULA: Exactly. But now they have to worry if we're going to go in and take over Iraq, there's going to be a short-term disruption of Iraqi oil, which there already is, so people are saying you've got to keep it... I actually really have to make this call, we just came up on a dollar, I'm sorry, do you mind?

PAUL SOLMAN: No, go right ahead.

PAUL SOLMAN: Our interview may have cost the man money.

AL ZAPULA: He is the (bleep) worst.

PAUL SOLMAN: Because oil for near term delivery which had risen at the start of trades was down to now $34 a barrel, a loss of almost 6 percent within minutes -- the equivalent of a 500 or so point in the Dow.

MIKE HILEY: It's collapsing, it started up here.

PAUL SOLMAN: Which prompted another interpretation. Broker Mike HIley.

MIKE HILEY: We came in this morning thinking that the 17th was the day. At 12/:01 there would Tomahawk Cruise missiles in the air. People are continuing to take the war premium out of oil prices now.

PAUL SOLMAN: How many of a premium are buyers paying because war fears? Estimates here range from $2 to $10. Subtract $10 and you get some $25 a barrel that would be 25 cent less at the pump which is the price of oil futures.

MIKE HILEY: Here we are the current price is $34. This was Friday's price. Again it flattens out around $25.

PAUL SOLMAN: I see. So once you get out past around what year is this?

MIKE HILEY: That is 05.

PAUL SOLMAN: 2005. Basically the prediction is that the oil price is going to stay a little below $25 out into the future.

PAUL SOLMAN: Now this long-term trend fits well with the plans of yet another country heard fro:. Saudi Arabia with 12 percent of world oil production, a quarter of more of the world's reserves and the world's easiest oil to get at.

DAVID NISSEN: The best bet in the forecast in the price of oil is when you think the Saudis want the price of oil to be.

PAUL SOLMAN: Columbia University Prof. David Nissen spent decades in the oil business.

DAVID NISSEN: The Saudis aim to bring the oil market into compliance with what people typically have accepted it to be. Current policy for OPEC is 22 to $27 a barrel and bad things happen what it gets out of the range.

PAUL SOLMAN: Nissen means that the Saudis in it for the long run want to keep prices reasonable because if prices rise too high the world might spiral into recession and cut back drastically on buying oil, might drill for oil otherwise the Middle East, might even switch to alternative energy. The prices crude had swung up to $35 for which we heard almost as many reasons as there were traders on the desk.

JAN STUART: To call it an imperfect science is being way too nice. There are trend lines, directions - there are turning points, that's about as good as you are going to get.

PAUL SOLMAN: AT the end of the day, though, oil had dipped below 30 for the first time this year -- a 17 percent drop since Monday morning. It's the collective best guess of those willing to bet on the eve of war and despite fears like torched oil wells in Iraq the market seems less worried than it has been in quite a while.

newstribune.com Thursday, March 20, 2003

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," said 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 had 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 Wednesday. "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.

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.

www.vheadline.com Posted: Thursday, March 20, 2003 By: Oscar Heck

VHeadline.com commentarist Oscar Heck writes: I do not want to sound alarmist … but I find the need to “get something off my chest”.

As I have mentioned in previous articles, I have no interest in writing about the USA itself. I do however have interest in writing about the USA when I notice that the USA is sticking its nose into Venezuelan affairs.

So, here it goes.

I am in Canada at the moment. A few days ago, Jean Chretien, Canada’s Prime Minister, finally revealed Canada’s stance on Iraq. It was clear. Canada does not support the USA in its declaration of war on Iraq without UN approval. Chretien also mentioned that Canada will not send troops to assist the USA. (Surprise?). A poll was carried out shortly thereafter reflecting that 80% of Canadians are in agreement with Chretien.

Since this declaration, there appears to have sprouted much anti-Canadian sentiment in the USA. This morning’s news mentioned that a radio station in Florida (that has a large Canadian “winter” audience) cancelled the portion of its daily regular programming that is produced in Toronto (Canada). The radio station apparently canceled the show because it is produced by Canadians ... emphasizing that they don’t need Canadian material as part of their programming.

The news also reported that the Canadian defense systems manufacturers (who are physically located within Canada), have been asked by their USA customers, to relocate their manufacturing installations within the USA ... the reason being to minimize transportation delays at border crossings. (Yeah, sure!)

The reporter who reported this news is also a commentarist … and he had the same reaction.

Note: I have done extensive work in the USA setting up manufacturing operations in Vermont, Texas and New York. If a Canadian company sets up operations in the USA, the vast majority of its employees must, by law, be American (versus, for example, Canadians working there with a work permit). In other words, reduce the USA unemployment rate and increase Canada’s.

Is this a threat by the USA? A type of economic embargo … as they have subtly done with Canadian softwood? … with Cuba … with Iraq… now … punish anyone that does not back the USA 100%?

As I write, Rumsfeld is talking about “Operation Iraqi Freedom” and the intent of the USA being to “liberate” the Iraqi people from Saddam’s “oppressive regime”. On the other hand, I also heard on the news, that the Turkey refused a $-multi billion deal allowing the USA to use their territory for military operations … and, that the USA is still trying to negotiate with them, now adding some Iraqi petroleum operations to the offer (once the USA has taken over Iraq).

So, some of my questions are: Who gave the USA permission to steal someone else’s land?

Who gave the USA the right to “judge” the Iraqi situation enough to state that they are there to “free” the Iraqi people from oppression, from a dictator, from a non-democratic leader… and this, while killing-off a few Iraqis (collateral damage?) and while pre-negotiating with their land?

In the previous paragraph I mention: “ to “free” the Iraqi people from oppression, from a dictator, from a non-democratic leader…”

Doesn’t this sound familiar? These are exactly the same type of words that the anti-Chavez opposition has been using for months!

Isn’t it also true that Condoleezza Rice almost applauded Carmona Estanga and gang for having, in a way, “liberated” Venezuela from an oppressive anti-democratic dictator such as Chavez?

Later she had to retract a little and apparently called for Chavez to "respect constitutional processes." No mention of Carmona and gang? As far as I have seen, the USA never condemned Carmona and gang for being dictatorial or anti-democratic. My conclusion?

I believe that by attacking Iraq, the USA is setting precedent for itself for future invasions. In other words, it is OK to invade another country if it is to “free” the people from oppressive anti-democratic dictators.

This really scares me!

The opposition to Chavez has been spreading all sorts of lies: Chavez is involved in terrorism with Saddam and company, the Chavez government is involved in chemical weapons manufacturing, Chavez is a dictator, he is anti-democratic, he is a communist, the Chavez government is oppressive, etc.

Doesn’t that now give the USA the “right” to militarily invade Venezuela? … to “liberate” the Venezuelan people from an oppressive anti-democratic, terrorist, communist dictator? Why does the USA not “liberate” the Sudanese people? No oil perhaps? No easily accessible riches such as precious stones or gold? I do not know the answers to these questions … but I suspect this rhetoric is not far from the truth.

To come back to Venezuela ... Venezuela has a beautiful rich culture which I hope will not be lost to the “invaders.” I hope the “invaders” will never come.

The word "invaders" can be broken up into two words:

Raven: (verb): 1) to seize forcibly; 2) to plunder; 3) to devour greedily; 4) to have a voracious appetite.

Dis: (noun): 1) the god of the underworld, Pluto; 2) the underworld, Hades

I hope that the opposition to Chavez will think deeply about the repercussions of their actions and lies.

Oscar Heck oscarheck111@hotmail.com

www.forbes.com Reuters, 03.20.03, 4:49 PM ET By Meredith Grossman Dubner

CHICAGO (Reuters) - U.S. airlines will likely wait to lock in costs on future jet fuel purchases to see if oil prices -- already at three-month lows at the start of an Iraq war -- fall even further, analysts said Thursday.

Jet fuel, which makes up about 15 percent of airlines' operating costs, is the industry's second-largest expense after labor and is also one of the toughest to manage. Airlines try to control fuel costs by hedging, which helps them protect against higher prices down the road.

Airlines consume 18 billion gallons of jet fuel a year, and each penny increase in jet fuel means an additional $180 million in costs for the industry, according to the Air Transport Association, the airlines' main trade group.

Jet fuel, which peaked near $1.20 a gallon last month, will cost the industry about $16 billion this year if it remains near 90 cents per gallon.

Jet fuel prices are closely tied to heating oil and crude oil. Nearby heating oil futures have slipped more than a third in the last week to 83 cents a gallon, down from an all-time high of $1.31 a gallon four weeks ago.

Nearby crude oil futures in the last week have plunged about 27 percent to $29 a barrel from just four weeks ago, when they hit a 12-year high of $40 -- their highest level since the 1991 Gulf War.

"To the extent that (crude oil) gets back down into the low $20s, maybe (airlines) do start layering on more hedges. But I don't think you're likely to see that until we get down to that level," said William Warlick, airline analyst at Fitch Ratings.

FIGHTING TO OFFSET LOSSES

Airlines can hedge fuel costs with futures and options on heating oil and crude oil, or through forward contracts with the oil companies themselves, among other strategies.

"The reason you hedge is to reduce the volatility of your earnings. The war introduces a whole new component into volatility of earnings," said David Swierenga, chief economist at the Air Transport Association.

Many airlines, expecting that an Iraq war and the strike in Venezuela could prompt a spike in oil prices, put on hedges late last year when crude was more than $30. Others, though, were hesitant to commit to hedges at those prices, fearing they would lock themselves into fuel prices that would be too high once a war passed, said Ray Neidl, analyst at Blaylock & Partners.

UAL Corp.'s United Airlines, which filed the largest bankruptcy in aviation history in December, has said it has no hedges for its 2003 fuel purchases. US Airways Group , also in bankruptcy, may have a small amount of hedges, if any, analysts said.

Low-cost carrier Southwest Airlines and No. 4 U.S. airline Northwest Airlines have both said they are fully hedged for first-quarter fuel purchases. Southwest is also roughly 87 percent hedged for the second quarter at $23 a barrel.

Other airlines are currently hedged between 40 percent and 60 percent for fuel costs at prices between $20 and $30 a barrel, Neidl said.

"In contrast to the early 1990s where many, if not most, U.S. airlines were unhedged, the U.S. airlines have become more proactive and are more hedged with respect to fuel price exposure," Deutsche Bank analyst Susan Donofrio said in a recent research note.

The biggest eight U.S. airlines posted losses of more than $11 billion for 2002. Airlines have tried to offset rising fuel costs by tacking on ticket surcharges, but travelers have not been receptive in an environment where demand for air travel is already weak.

"The war premium seems to be disappearing because people ... are assuming that this war will be quick," said Aaron Brady, senior analyst at Energy Security Analysis near Boston. "(But) if there are dramatic developments like Saddam blowing up all his oil fields, you can bet that prices will reverse rather quickly."

www.voanews.com Melanie Sully Vienna 20 Mar 2003, 20:14 UTC

The Organization of the Petroleum Exporting Countries, OPEC, says it can make up any oil shortage caused by the Iraq war.

The general secretary of OPEC, Alvaro Silva Calderon, told reporters the cartel would offset any shortfall in oil production because of the war in Iraq. "The member countries have pledged to use spare capacity if it is necessary," he said. "It does not mean that we are eliminating the quota system. We are facing an emergency."

Mr. Silva Calderon said that, at the present time, there is enough oil on the market to meet world demand.

Saudi Arabia has said it will increase crude oil production to help stabilize world markets. Another plus is that oil production in Venezuela, which had been reduced because of a long strike, is beginning to return to normal.

But analysts say that if the war lasts for months, rather than weeks, shortages could occur.