IEA speaks

The International Energy Agency said yesterday it sees no reason to release emergency crude oil stocks despite the situation in Iraq. "There is no event in Iraq that makes us fear about a disruption in oil supply," IEA spokesman Pierre Lefevre said.

On Thursday, soon after US-led troops launched an invasion of Iraq, the Paris-based energy watchdog said increased production from OPEC kingpin Saudi Arabia and key member Venezuela, combined with lower demand for heating oil in the US, helped to reinforce confidence that demand would be met.

The IEA has said it will allow the Organization of Petroleum Ex-porting Countries to have first crack at supplying customers before the IEA takes a decision to release stocks.

OPEC Secretary-General Alvaro Silva Calderon told a news conference on Thursday at the group's headquarters in Vienna that members have been authorized to exceed their output quotas if they decide on their own that such a step is necessary. No new meeting would be needed, he said.

Saudi Arabia, the OPEC member with the greatest excess capacity, indicated it was ready to raise production but did not specify whether that would be in the context of an overall agreement.

Iraq's oil exports through the United Nations' oil-for-food program, normally around 1.7 million barrels a day, are now at a standstill following the withdrawal of UN staff from Iraq on Tuesday.

Markets seemed to take comfort from the speed of the US-British advance and shrugged off the latest news of an increased number of Iraqi oil well fires. The lack of an impact from the war on oil shipments from Kuwait also inspired confidence.

Crude prices retreated in early trading yesterday despite the British government's confirmation of fires at 30 Iraqi oil wells.

May contracts of North Sea Brent, Europe's benchmark price for crude, fell as much as 70 US cents to US$24.80 a barrel on London's International Petroleum Exchange.

Contracts of US light, sweet crude for May delivery were 67 US cents lower at US$27.45, in electronic, pre-session trading in New York.

On the stock market, European stocks in yesterday's morning session headed for their biggest weekly gain since September 2001, based on traders' optimism that the Iraq conflict will be resolved quickly and consumer confidence should be boosted and capital expenditure might follow.

On Thursday, European Union leaders drafted a new commitment to create jobs and push through reforms in an attempt to make the EU the world's most competitive economy by 2010.

The draft statement reiterated the need to make it easier for Europe's employers to hire and fire workers, and to create new tax benefits to encourage competitive practices.

It said EU leaders would form what it called an "employment taskforce" to seek further reforms designed to create more and better jobs. Media reports said the taskforce would be headed by former Dutch Premier Wim Kok.

Leaders also planned to restate their longstanding commitment to open up the electricity, gas, railway and financial markets to competition.

The summit acknowledged the EU's previous failure to implement past pledges on such practical reforms, but vowed this time to follow through on their commitment.

The oil market has done a good job

A wild ride for oil prices leading into the US war on Iraq may have looked mad to people on the sidelines, but experts say the dramatic price moves reflect a market doing its job to ensure stable supplies.

Oil prices have dropped 30% in the past week to below $US27 a barrel on expectations of a swift victory for US forces in Iraq.

Just three weeks ago, prices were near $US40 after a dizzying 60% rise in three months on fears that the coming war would cut Middle East supplies.

"The oil market has done a good job," said Jim Ritterbusch, an analyst with Ritterbusch and Associates. "Prices shot up to $US40 because of a very uncertain outlook for the war amidst low stock cover here at home, and signaled the need for higher imports. And the price plunge was a market mechanism simply discounting for a fast, clean war."

Oil's dramatic prewar gyrations were mirrored in other financial markets including gold, stocks and the US dollar. But oil's dependence on the Middle East, which supplies 40% of world crude exports, made it swing even more dramatically.

The petroleum price meltdown was similar to the situation of more than a decade ago when the United States launched its offensive in the first Gulf War. The difference was that the selloff this time started even before the opening missile salvos, as dealers scrambled to stay ahead of the price curve.

"The reversal has gone from 'Oh God, this is going to be awful' to 'We're just going to walk right into Baghdad with flowers in our gun barrels,'" said Bill O'Grady, analyst at AG Edwards.

A lack of spare supply has made oil markets more vulnerable than usual to sudden moves, driven by investment fund speculators taking big bets on the direction of prices.

US crude oil supplies are near the lowest levels since 1975 after an oil workers' strike in key regional oil exporter Venezuela ran down supplies during a severe northern winter.

March 21, 2003 Oil prices continued in a virtual freefall By Hil Anderson UPI Chief Energy Correspondent

     LOS ANGELES, March 21 (UPI) -- Oil prices continued in a virtual freefall, dropping more than $1 per barrel on the New York Mercantile Exchange in unusually bearish trading for a Friday when the vital Persian Gulf was at war as American and British forces rolled through the southern oilfields of Iraq.
     NYMEX had been expected to test downward resistance at $27 per barrel and did just that, closing at $26.91, down $1.21 on the day and nearly $9 below the end of last week. Heating oil and gasoline both dipped around 6 cents per gallon.      Traders generally tend to buy up oil on Fridays during times of uncertainty so as not to be caught short if the situation deteriorates and prices soar over the weekend. The past week, however, has been primarily bearish with the market looking ahead to a quick end to the campaign and the erasure of the "war premium" that has tacked around $4 to the price of a barrel of crude and has sent gasoline prices sky-high at the pump.      World wartime oil production this week was only slightly below what it had been last November, Energy Secretary Spencer Abraham said Friday in his latest announcement aimed at reassuring nervous energy markets and consumers.      Abraham said that OPEC production as of Thursday was 26.5 million barrels per day, less than a half-million barrels below output levels seen last November.      "This is despite losing all production from Iraq and also incurring other production losses from Venezuela and Nigeria," Abraham pointed out. "Working with International Energy Agency partners, we continue to monitor global oil market conditions. We appreciate the continued commitment by oil producing countries to ensure stability in the world oil markets."      On the military front, U.S. and British forces secured the southern port of Umm Qasar and were reportedly pressuring the larger oil city of Basra. The Basra, Umm Qasar and the nearby tanker terminal at Mina al-Bakar will give the allies control of Iraq's deep-water harbors on the Persian Gulf.      Umm Qasar is located downriver from Basra and the southern oilfields that allied troops moved into on Friday. Although said to be in a state of disrepair, Umm Qasar was nevertheless functional up until the start of the war and could be ramped up in order to handle both supplies for post-war reconstruction and oil exports that will help pay for the task. Mina al-Bakar was heavily damaged in the first Gulf War but was one of the few oil facilities Saddam Hussein's regime repaired in the subsequent years and is the only Iraqi port on the Persian Gulf capable of accommodating larger oceangoing tankers.

Tesoro needs the money Howard Dicus   Pacific Business News

Tesoro Petroleum Corp. has told the Securities and Exchange Commission that the recent oil price situation, so clearly a bad news story from the point of view of consumers and businesses that rely on fuel to transport their goods, is much-needed good news for the owner of one of the two refineries on Oahu.

In its 10-K filing Friday to the SEC, Tesoro told the same story we've all heard before, but from the point of view of a debt-ridden petroleum refining and marketing company that can use higher revenues to reduce that debt and perform useful capital improvements on its refineries.

"The prices of crude oil and refined products have fluctuated substantially in our markets. Our operating results can be significantly influenced by the timing of changes in crude oil costs and how quickly refined product prices adjust to reflect these changes," Tesoro said.

"These price fluctuations depend on numerous factors beyond our control, including the demand for crude oil, gasoline and other refined products, which is subject to, among other things, changes in the economy and the level of foreign and domestic production of crude oil and refined products, worldwide political conditions, threatened or actual terrorist incidents or acts of war."

During 2002, Tesoro said, it experienced the lowest refined product margins since 1998. Demand for jet fuel plummeted after 9/11, and the winter of 2001-2002 was mild, reducing demand for heating oil as well.

When there is less demand for those fuels, refineries devote more capacity to gasoline. But when there's more gasoline, it gets cheaper. Margins fall for refineries. This happened for Tesoro right after it had spent big money acquiring more refineries on the mainland.

Even when crude oil prices began to climb in 2002 because of the Iraq crisis and a general strike in Venezuela, retail prices were slow to catch up and margins actually fell some more at first.

But now the story takes a turn in a more positive direction, at least from the point of view of a refiner.

The prices charged by refiners began to catch up. And the winter of 2002-2003 was really cold. Heating oil demand soared, and to meet that demand by making more heating oil, refiners made less jet fuel and gasoline.

"We believe the industry conditions that led to low margins in 2002 have improved," Tesoro said. "The winter in the Northeast has been extremely cold in 2003, increasing demand and margins for distillates throughout the country. Jet fuel demand has slowly improved and now approaches pre-September 11, 2001 levels. Gasoline supply is expected to tighten."

There's your happy ending...provided you're a refiner.

Postscript: Tesoro said in the same Friday filing that it intends to spend several million of the dollars it hopes to make on improvements to its refinery on Oahu.

Cost of war Daniel Altman The New York Times Saturday, March 22, 2003   NEW YORK The cost to the United States of the war in Iraq and its aftermath could easily exceed $100 billion, according to evidence massed by experts from Wall Street, Washington and academia. In the opinion of several economists and military analysts, the government's wartime spending will be just the tip of a towering iceberg. The burdens that follow - from occupation, reconstruction, humanitarian aid and checkbook diplomacy - could extend well into the coming decade. Overall effects on the economy could also stretch far beyond the bill for taxpayers. The uncertainty that preceded the war already exacted a severe cost in terms of economic growth. Changes in oil prices, insurance premiums and the attitudes of consumers and corporate leaders - all of which may depend on the war's outcome - will determine what comes next. "If we get through this without major damage to Iraqi oil facilities, and without any kind of terrorist action, and relatively quickly on the military front, I would think that would be good for the economy," said Peter Hooper, chief United States economist at Deutsche Bank Securities. The war itself is likely to cost between $22 billion and $60 billion, according to calculations made last year by the Congressional Budget Office and the House Budget Committee's Democratic staff. Peace-keeping in Iraq and rebuilding the country's infrastructure could add much more. A report to be released Monday by Taxpayers for Common Sense, an advocacy group, priced a possible five-year deployment of 50,000 troops - the American share of a 100,000-strong force - at $66 billion. The United Nations Development Program has estimated the cost of humanitarian aid and economic recovery, including rebuilding infrastructure and civil institutions, at about $10 billion a year for at least three years. Taxpayers for Common Sense put the total cost of the world's engagement with Iraq at $544 billion, spread over 10 years. But the United States may not have to bear all of that cost. "There's starting to be some evidence that we're going to have some friends come in on this, it's just a question of how much they're going to contribute," said Keith Ashdown, the group's vice president for policy. Some European countries have talked about offering aid, he noted, but only Japan has made a firm commitment, of about $1 billion. The Bush administration has stayed tightlipped about the cost of the war and reconstruction since December. At that time, Mitchell Daniels Jr., the White House's budget director, mentioned a range of $50 billion to $60 billion for military costs - far lower than earlier estimates of $100 billion to $200 billion made by Lawrence Lindsey, formerly the White House's top economic adviser. Both the White House and the Pentagon refused to offer any definite figures Friday, but Claire Buchan, a White House spokeswoman, said that the administration would send a budget request to Congress shortly. She added that some funds for postwar aid and homeland security would be included alongside wartime spending. For the economy as a whole, the effects of the war could range from mildly positive to, if the war turns sour, strongly negative. But the most severe repercussions so far appear to have stemmed from the uncertainty that preceded the war, and the high oil prices that came with it. "In terms of growth in the first half of the year, we're going to be somewhere in the vicinity of 2 percent" at an annual rate, Hooper predicted. Without the war-related uncertainty, he said, the economy would probably have been able to expand at an annual rate of 3 percent in the first half. Most analysts agree that a "war premium" partially accounted for the run-up in oil prices in recent months. The strike in Venezuela's oil industry, which has reduced global supply, makes isolating the war's effect difficult, though. Edward McKelvey, a senior economist at Goldman, Sachs, said that he had heard figures of $7 to $10 a barrel for the premium in the first quarter of this year. A premium of $10, he said, would cost consumers about $50 billion a year. Still, he cautioned, "you don't have any really good sense of where the baseline was." A recent estimate by the Center for Strategic and International Studies put the premium far lower, at $2 or $3. Blaming the war for weaker retail sales and a lack of hiring might be a step too far, though, McKelvey said. "How much of that's war uncertainty, and how much of it's other stuff? We would tend to go with other stuff." In any event, the war premium appears to be disappearing. Oil prices have dropped to about $27 a barrel from a peak of about $38 on March 7. If this trend holds, the war's indirect impact on the economy could be minimal, according to a study by William Nordhaus, a professor of economics at Yale University. In a worst-case scenario, which now looks less likely, a price spike could cost as much as $391 billion over 10 years. "Looking at the extent to which oil prices have dropped in the last couple of days, and the stock market balance has risen, it's so far going according to a relatively optimistic script," Hooper said. But he warned that the optimism could be short-lived. "If Iraq is resolved successfully, there are other potential geopolitical clouds on the horizon."