<a href=www.thestar.com>Source Mar. 23, 2003. 02:05 PM DAVID OLIVE

In his brief televised address last Monday, George W. Bush offered no rationale for the U.S. attack on Iraq.

The U.S. president left that task to his vice-president, Dick Cheney, described last week by the Wall Street Journal as having "the highest credibility with Bush" among White House war advisers.

For months, Cheney has quietly disparaged the diplomatic manoeuvres on Iraq, counselling Bush to topple Saddam Hussein by force.

Last Sunday, the reclusive Cheney made his first talk-show appearance in seven months to offer perhaps the U.S. administration's fullest justification yet for war in Iraq.

Here are excerpts from Cheney's interview with Tim Russert on Meet The Press:

Cheney: "We have to address the question of where might these terrorists acquire weapons of mass destruction ... and Saddam Hussein becomes a prime suspect.... We know he has a long-standing relationship with various terrorist groups, including the Al Qaeda organization."

Even the most hawkish supporters of war on Iraq acknowledge that the Bush administration has continually failed to establish a substantive link between Saddam and Al Qaeda, which drew most of its funding and its Sept. 11 hijackers from Saudi Arabian sources and sought refuge in Afghanistan, Pakistan, Yemen, Sudan and Florida, but not Iraq.

There is no evidence Saddam, in his more than 20 years in power, shared his weapons with terrorists.

And International Atomic Energy Agency inspectors can find no evidence of a current Iraqi nuclear program.

Terrorists would most likely tap the huge and poorly guarded nuclear-weapons stockpile of Russia, or equip themselves with nuclear material that an impoverished North Korea, desperate for hard currency, is openly threatening to sell to all comers.

Cheney: "I have argued in the past, and would again, if we had been able to pre-empt the attacks of 9/11, would we have done it? And I think absolutely."

Cheney is suggesting here that the U.S. wishes it could have mounted a pre-emptive strike on a nation behind the Sept. 11 tragedy. But there was no such nation.

As for what the U.S. could have done by way of pre-emption, the U.S. intelligence community failed to do what was expected of it pre-Sept. 11.

Late in the day, Bush was presented in August, 2001, with a U.S. intelligence warning of a Sept. 11-type threat and chose not to act on it.

Earlier in 2001, Cheney short-circuited a congressional effort to bolster anti-terrorism measures.

He chose instead to spearhead an anti-terrorism task force of his own, with the goal of ensuring that the White House, rather than Congress, would get the credit for any reforms that resulted. But the Cheney task force was virtually inactive in the months prior to 9/11.

Cheney: "If you look at the track record of the International Atomic Energy Agency.... They have consistently underestimated or missed what it was Saddam Hussein was doing."

The credibility problem here rests with the Bush administration, not the IAEA. Early this year, the U.S. and Britain gave U.N. inspectors what they described as irrefutable proof that Iraq tried to obtain uranium from Niger, presumably for a nuclear weapon. The documents were almost immediately exposed as forgeries.

Cheney: "Our objective will be ... a government that's preserving the territorial integrity of Iraq and stands up a broadly representative government of the Iraqi people."

It is unlikely the people Cheney has in mind to lead a post-war Iraq would be "broadly representative" of Iraqi civilians.

Cheney and his top aides are pressuring a reluctant U.S. State Department to find a significant governing role in a post-war Iraq for Ahmed Chalabi, an Iraqi exile whose family ran the country decades ago.

Chalabi is now eager to head a post-war Iraq. The wealthy Chalabi, a golf partner of Cheney since the mid-1990s, was convicted in a Jordanian banking scandal about a decade ago.

Cheney: "We need to be prepared to provide humanitarian assistance, medical care, food, all of those things that are required to have (post-war) Iraq up and running. And we are well-equipped to do that."

Not so, says the head of InterAction, the leading U.S. coalition of non-government overseas relief organizations.

"We don't think the relief and reconstruction needs of the Iraqi people will be adequately met, based on the overly optimistic scenarios we understand the U.S. government is using," InterAction head Mary McClymont told the Wall Street Journal.

Cheney: "That flow of (Iraqi oil revenue), obviously, belongs to the Iraqi people, needs to be put to use by the Iraqi people, and that will be one of our main objectives."

If oil-rich Nigeria, Venezuela, Iran, Sudan, Mexico and Indonesia are any indication, very little oil revenue trickles down to ordinary citizens.

One widely anticipated change in affairs, though: French oil giant Total SA, long active in Iraq, likely will be pushed aside by U.S. and British entrants including ExxonMobil Corp. and Royal Dutch/Shell Group, until now forbidden by their governments from exploiting the world's second-largest oil reserves.

Cheney: "As we go forward and look at the threat of rogue states and terrorists equipped with deadly weapons in the future, the only nation that really has the capability to deal effectively with those threats is the U.S. ... The fact of the matter is for most of the others who are engaged in this debate (at the Security Council), they don't have the capability to do anything about it."

As it happens, Security Council member China has a larger army than the U.S. and Britain combined. All five permanent council members Ñ the U.S., Britain and the anti-Iraq war China, France and Russia, have nuclear capability.

Nuclear weapons are the only proven "weapons of mass destruction" Ñ capable of widespread property destruction and the immediate, certain death of millions of people.

In asserting that other nations are not up to the job, Cheney is in fact claiming a new role for the U.S. as the world's sole "constabulatory" power, a term he and other hawks are using with increasing frequency.

The assumption of this role requires that international bodies, including those of America's own creation (the United Nations, NATO, the Organization of american States, etc.), must be discredited.

Cheney: "In the past, many of our friends in Europe and elsewhere around the world, when they see a state that's sponsored terror, frankly, was willing to look the other way ...."

The U.S. itself has looked the other way when confronted with reports of chronic human-rights violations by countries it supports.

It did so in the 1980s when Saddam was inflicting brutalities on his own people while warring with a U.S. enemy, Iran.

As CEO of the oil-services giant Halliburton Co. in the 1990s, Cheney headed a company in violation of U.S. government bans on the sale of goods to Iraq and other countries deemed by the U.S. State Department to be "rogue nations."

As late as 2000, Halliburton was Iraq's largest supplier of oil-field services, and CEO Cheney was lobbying the U.N. to lift sanctions on Saddam's regime.

Cheney: "After we got hit on 9/11, (the president) enunciated the Bush doctrine that we will hold states that sponsor terror, that provide sanctuary for terrorists, to account.... That's a brand-new departure. We've never done that before. It makes people very uncomfortable, but it's absolutely essential."

Dating from 1903, when the U.S. supported an uprising in the breakaway Colombia state of Panama to facilitate a U.S.-built canal, Washington has sponsored efforts at regime change in Guatemala, Iran, Cuba, South Vietnam, Chile, Afghanistan, Libya, Grenada, Nicaragua, Panama, Somalia, Haiti and Bosnia. This is not a complete list.

Cheney: "The U.S. has established over the last several years ... an unfortunate practice that we've often failed to respond effectively to attacks on the U.S.

We had situations in '83 when the Marine barracks was blown up in Beirut. There was no effective U.S. response.

"In '93, the World Trade Center in New York hit; no effective response. In '96, Khobar Towers.

"In '98, the east Africa embassy bombings. In 2000, the USS Cole was hit.

"And each time there was almost no credible response for the United States to these attacks."

What these incidents have in common is that Iraq had nothing to do with them.

Russert asked what would be next after Iraq. Would the U.S. consider military action to pre-empt the nuclear programs of North Korea or Iran?

Cheney: "I didn't come this morning to announce any new military ventures or, frankly, to take any off the table. We haven't thought in those terms."

In the late 1990s, Cheney, future U.S. defence secretary Donald Rumsfeld and several men who now work for them as top advisers began to think very much in those terms.

They signed a founding manifesto of the Project For A New American Century, a conservative Washington think-tank.

The manifesto called for the United States to stop working through the U.N., NATO and other organizations that constrain U.S. power, and to promote regime change around the world.

The director of the Project For A New American Century is William Kristol, who first gained attention as a vice-presidential adviser nicknamed "Dan Quayle's brain."

Kristol, who now edits the Rupert Murdoch-financed Weekly Standard, probably the most influential of America's neo-conservative journals, has said Saddam's ouster is only the beginning.

"We haven't persuaded the Bush administration of everything," Kristol was quoted recently.

"They need to rethink their policy toward Saudi Arabia.... The administration kicked the can down the road on North Korea, but that remains a threat."

Additional articles by David Olive

<a href=www.thestar.com>Analysts cite falling production costs as attraction of Canadian oil sands Mar. 22, 2003. 10:23 AM RICK WESTHEAD BUSINESS REPORTER

Bitumen once was carried out of open-pit mines by conveyors but now huge trucks at Syncrude's North Mine carry it to upgraders, where it is refined into synthetic oil.

The U.S.-led war in Iraq might help accelerate Canada's oil- sands industry.

Oil analysts and executives say the conflict likely will ramp up decades-old U.S. efforts to become less reliant on fuel from the Persian Gulf, and more dependent on Canada, which is politically stable and has a vast supply of the substance used to produce synthetic oil.

"The U.S. is seen as the enemy by many Arab countries and though there was nothing good about 9/11, it crystallized the value of a safe supply source," said Eric Newell, chairman of Syncrude Ltd., the largest producer of oil from the oil sands. "The size of the field is just vast. It's comparable to Saudi Arabia."

Twenty years ago, oil companies such as Suncor Energy Inc. and Syncrude Canada Ltd. began extracting bitumen — a tar-like substance with the consistency of molasses — and processing it into synthetic oil. Now, the companies that own the projects blanketing much of northeast Alberta are poised to bolster profits, thanks to lower refining and exploration costs, assured delivery by pipelines and the declining conventional North American oil industry.

"If the U.S. wants Canada to produce more oil, it's going to come from bitumen," said Ray Cej, the former chairman of the World Petroleum Congress. "All the other areas are on the decline."

At least three-quarters of the known supplies of conventional oil in Western Canada already have been taken out of the ground, while about half the natural gas reserves have been siphoned. More than 90 per cent of the bitumen, however, is waiting to be extracted, said Brian Prokop, an oil analyst with Peters & Co. in Calgary.

Moreover, U.S. President George W. Bush failed this week to open Alaska's Arctic National Wildlife Refuge to oil drilling when the Senate quashed the proposal, a defeat that may spur U.S. interest in Canada's synthetic oil.

"Reliable sources from Canada remain an important element in U.S. energy security," said U.S. Senator Jeff Bingaman, the top Democrat on the Senate energy and natural resources committee. "As conventional reserves are depleted, synthetic crude will become an increasingly important source."

This year, oil companies in Alberta are expected to produce 1 million barrels of bitumen a day, up from 825,000 a year ago, according to a TD Securities report. Within five years, the output is expected to more than double to 2.3 million barrels, which would still need to be upgraded to synthetic oil before it could be transported to U.S. customers through pipelines. Currently, 1 million barrels of bitumen can be upgraded into about 860,000 barrels of synthetic oil.

There's no shortage of bitumen, which was once used by some Native Canadians to seal birch-bark canoes. Under current technologies, which include open-pit mining and the use of steam to extract bitumen from deeper mines, more than 300 billion barrels are expected to be recoverable, according to the Alberta Energy & Utilities Board. By comparison, Saudi Arabia's current proven conventional oil reserves are estimated to be 260 billion barrels.

For Canadian refiners to compete in Texas's oil belt, they'll need to extend the existing arbitrage point of their pipelines about 800 kilometres south to Cushing, Okla., from Wood Bridge, Ill., said Reed Williams, executive vice-president of refining and marketing with Frontier Oil Corp. in Houston.

"Their biggest obstacle is keeping prices competitive and getting their supply further south," said Williams, whose company in January started a five-year agreement to buy heavy oil from Baytex Energy Ltd.

The United States has been trying to wean itself from Persian Gulf oil since at least 1973, when former president Richard Nixon said the country would stop importing oil by 1980. In 1979, president Jimmy Carter renewed the pledge, vowing oil imports wouldn't rise.

Carter turned down the heat in the White House and wore a sweater to underscore his resolve.

No administration has been successful because they "don't have the political will to sustain the policy and say to customers, `you can't buy the cheap oil from the Gulf, you have to buy this more expensive stuff,'" said William Hogan, a Ford administration energy official who's now a professor at Harvard University's Kennedy School of Government.

Another challenge may rest in limiting the costs of production tied to Canada's ratification of the Kyoto Protocol on climate change, which allows government agencies to force oil and gas producers and car makers to lower pollution levels.

Already, Petro-Canada has said its $5.2 billion oil-sands development may be in jeopardy because of the treaty, and Koch Industries Inc., the second-largest private company in the United States, halted construction on a $3.3 billion oil-sands mine led by TrueNorth Energy, its Canadian unit.

But U.S. companies remain interested in Canadian suppliers because oil prices have been competitive and Canada is "as safe a supplier as you're going to find," said Williams of Frontier Oil.

U.S. investors now are turning their attention to Canadian oil- sands refiners.

Suncor, for instance, was featured twice on U.S. business cable television network CNBC last month, while Business Week and Forbes magazines have written company profiles recently. Time magazine is working on a story about the oil sands for an upcoming issue.

Production costs continue to fall said Darlene Crowell, a Suncor spokesperson who said the company has received about 80 calls from interested U.S. investors the past month, double the typical number.

While Suncor shares have fallen 14 per cent during the past year, they have climbed 32 per cent over the past three years.

The shares of other companies with interests in the oil sands have enjoyed similar gains over the last 36 months: Canadian Natural Resources Ltd. is up 21 per cent, Imperial Oil Ltd. rose 30 per cent and EnCana Corp. rose 19 per cent.

The S&P/TSX Energy Index has skyrocketed 49 per cent since 2000. During the same period, the broader S&P/TSX composite index has fallen 13 per cent.

To be sure, Canada isn't the only major source of fuel in the Western Hemisphere. A year ago, the United States, which imports about 60 per cent of the 19 million barrels it consumes daily, imported 23.5 per cent of its oil from the Persian Gulf, down from 27.8 per cent in 1977, as it turned to suppliers in Venezuela, Mexico and Brazil, as well as Canada.

In January, Canada exported an average 1.6 million barrels of crude oil per day into the United States, trailing only Saudi Arabia (1.8 million), according to the U.S. energy department.

The process of upgrading bitumen has been streamlined since 1920, when Alberta scientist Karl Clark first shovelled oil sand into his washing machine and mixed it with hot water and caustic soda, which allowed the bitumen to rise to the surface.

When the first bitumen mine opened in Alberta in 1967, large draglines, which were expensive to maintain, were used to scoop the oil sands on to conveyor belts that carried it to machines where the bitumen was separated from the sand using hot water.

Now, cheaper trucks and shovels are used in most open-pit mines. To reach deeper deposits, steam is injected into wells, making extraction possible.

For years, investors were skeptical about whether the developing the oil sands would be profitable because of the high costs of upgrading and refining. Syncrude's Newell said the industry has invested about $24 billion since 1996 alone.

"It's not an investment for the faint of heart," he said, "but it's one where we're fighting a lot of myths. It's actually become quite profitable."

While it cost more than $30 in the 1970s to refine each barrel of synthetic oil, it now costs about $13 and within the next three years, that cost might drop to $8 a barrel, said Real Doucet, senior vice-president of oil sands with Canadian Natural in Fort McMurray, Alberta.

"The technology is improving, making the oil sands more economical," said Doucet, whose company ships about 400,000 barrels of oil a day to the United States, of which 100,000 is synthetic crude.

One way Canadian Natural Resources and others cut costs is by re-using hot water. In older facilities, millions of gallons of hot water were returned to ponds after being used to separate bitumen from sand. Now, most of that hot water is kept in the refinery, eliminating the need to re-heat it.

Oil closed yesterday at $26.91 (U.S.) a barrel in New York and prices are expected to remain above $20 (U.S.) for at least the next decade.

Even though they may dip if the U.S. topples Saddam Hussein's government, the oil-sands business probably will turn a profit as long as prices don't fall below $17 (U.S.) a barrel, Prokop said.

That's unlikely to happen, Canadian oil executives said, because energy supplies are much lower than they were after the first Gulf War, thanks in part to oil workers striking in Venezuela, and production cuts in Nigeria, another large producer.

Learn Monday 24 March 2003, 12:30 PM

Australia would find itself with severe oil and gas shortages in the next decade if billions of dollars were not invested in exploration, a key industry body said.

The Australian Petroleum Production and Exploration Association (APPEA) said $14.5 billion was needed to discover and develop oil and gas fields in Australia to replace depleting supplies in Bass Strait.

Another $20 billion was needed if Australia wanted to find enough oil and gas to be self-sufficient, said APPEA executive director Barry Jones.

"We have to either make it more attractive to invest, or make it safer to import from overseas," Mr Jones said.

"The Australian government will have to help to do both.

"The idea that somehow we might be able to attract $35 billion of new capital in Australia in the next 12 years to take us from the lowest supply curve to the demand curve is pretty close to impossible, so we are going to have to import.

"To import you have to make it safer, with less political risk."

Mr Jones said increased investment and safe trade links required the government to stop "tinkering" with ethanol and renewable energy issues and focus on ways to improve exploration, tax and foreign policy.

The government needed to simplify the exploration approval process, cutting down on environmental and native title bureaucracy, he said.

It had to realise the tax regime was not set in stone and make changes to ensure exploration, development and production of Australian reserves were competitive with areas such as the Gulf of Mexico and the Caribbean.

And it had to review its foreign policy, to secure increased trade with the Middle East.

Mr Jones said capital in the oil and gas industry would be spread thin in the years ahead as oil companies injected money into clearing up trouble spots such as Venezuela and Iraq after the war.

While Australia was 40 per cent self sufficient in oil, it imported 40 per cent of its supply from Asia and 20 per cent from the Middle East.

More attention would have to be paid to the Middle East region if Australia wanted to ensure long-term secure supply, Mr Jones said.

"Our foreign policy needs to take into account our long-term liquid energy needs," he said.

Read... Monday March 24, 11:25 AM Contact Us: Bombay 91 22 2288 4212-18, New Delhi 91 11 2307 4020; kindly email your feedback to DJN.IN@dowjones.com

0855 [Dow Jones] Oil prices may not fall as fast as they did after first Gulf War because of low inventories, says Shell global business environment manager David Frowd. "Stocks today, particularly in the U.S., are very low, supporting prices in the upper 20s (dollars a barrel) even without a war premium," he tells oil conference in Melbourne. Says OPEC capacity enough to cover lost Iraqi output, provided no interruptions in Venezuela or elsewhere. (AND)

0852 [Dow Jones] OVERSEAS SHARES FRIDAY: Indian ADRs ended higher Friday on Nasdaq's 1.4% rise; Infosys (500209) up 5.2% at $67.21 (share equivalent INR6,405) and Satyam Infoway up 7.7% at $3.66 (not listed in India). On NYSE, Wipro (507685) up 6.2% at $31.50 (share equivalent INR1,501), Silverline (500389) up 4.6% at $1.83 (share equivalent INR9), Dr. Reddy's (500124) up 2.7% at $19.30 (share equivalent INR1,839) and Satyam Computer (500376) up 0.3% at $9.88 (share equivalent INR235).(ABB)

0848 [Dow Jones] Some unease may grow in Asia markets (despite Friday's NY gains in U.S. stocks, USD) with some setbacks for U.S. coalition forces; troops more than two-thirds of way to Baghdad but being slowed by fierce resistance in south, while Iraq has captured handful of U.S. soldiers. Iraqi air defenses remain active; suggests Iraq military leaders retain at least some control of forces around Baghdad. Scattering of special-forces troops operating in North, but promised big northern front yet to materialize; and much-hoped-for mass surrenders of Iraqi soldiers haven't occurred. (RXM)

0846 [Dow Jones] Asia bourses heavily weighted toward successful, and fast, conclusion for U.S. in war vs Iraq, but players probably too optimistic Iraqi regime can be toppled quickly, say analysts; and war's unlikely to improve economic fundamentals, company balance sheets. "Finding a solid explanation for this rather perverse relief rally is difficult, making it hard to justify playing this volatile market," says Henderson Global's Shane Oliver.(RXM)

0843 [Dow Jones] One potentially complicating factor for U.S.-led war on Iraq which may start to concern market: U.S. denies reports Turkey has sent troops into northern Iraq since war started but some fear this still possible; U.S., Russia have called on Turkey to keep troops out, though Turkey has refused to agree to this, continuing to mass armor on Iraqi border. May raise fears of bloody "war within a war" between Turks and Kurds, provide distraction U.S. can ill-afford. (RXM)

0842 [Dow Jones] MSNBC TV quotes unnamed U.S. military officials as saying special operations teams and units of CIA are in Baghdad; officials hint recent explosions there (with no air raid sirens or indications of U.S. aircraft overhead) may have been work of Iraqi resistance groups, possibly working with U.S. forces. Unclear if this is just U.S. disinformation, but it may help sustain markets' hopes for quick U.S. victory. (AXT)

0838 [Dow Jones] U.S. officials say U.S. troops have found suspected "chemical factory" in south Iraq, but don't confirm whether it's actually believed to be chemical weapons facility as Fox TV reported earlier. If U.S. can prove Iraq had major WMD projects, it will greatly help to justify U.S. decision to go to war in court of world opinion, and reduce negative geopolitical fallout from war - so positive for USD and equities. (AXT)

0836 [Dow Jones] It became clear at weekend that one key war aim - securing Iraq's oilfields intact - has been mostly achieved. Key parts of southern fields and major export terminals on Gulf have been taken; northern fields not yet fully in U.S. hands but appear so far to have avoided damage; U.S. official said Saturday only 9 of Iraq's 500+ fields have been sabotaged. This removes one big fear of markets, even though fall of Baghdad may be days or weeks away. (AXT)

0834 [Dow Jones] WALL STREET: Stocks soared Friday, with DJIA going into positive territory for year on news of heavy bombardment of Baghdad; DJIA +2.8%, Nasdaq +1.3%, Philly semicon index +2.2% in heavy trade, with DJIA +8.4% for week, biggest weekly gain since October 1982. Players took cues too from reports suggesting Saddam Hussein may have been killed in initial air strike, though later reports cast doubt on this; airline, tourism stocks fared well with Southwest Airlines +7.3%, Walt Disney +9.3% on hopes a short war would ease concerns about tourism. Some analysts say this just relief rally, others though say gains have legs; "just as it wasn't smart to buy on the dips through the bear market, it's not wise to sell this rally," says one. EDS +12% after ousting CEO Thursday, Micron +11% despite 2Q loss as sales surged; but Intuit slid 24% on FY earnings warning. Intuit remained active after-hours, down another 1%.(RXM)

0830 [Dow Jones] OUTLOOK: 0900 RBI to release money market data for Saturday, Mumbai;

1000 Start of 2-day Gas Summit, organized by FICCI, Mumbai;

1200 RBI to announce results of 1-day repo and reverse repo auctions, Mumbai;

1200 Kotak Mahindra to hold media conference on its conversion to a bank, Mumbai;

Syngenta India to report FY02 results.(DJ Team)

Update Monday March 24, 7:41 AM By Stephen Parker Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Oil prices slid nearly 30% in the past seven trading days as the market bet on a best-case resolution of the war in Iraq, but fierce resistance Sunday slowed coalition forces' push toward Baghdad and could provide the first real test of the market's optimism, analysts said.

U.S. Central Command said Iraqis using ruses, including faked surrenders followed by ambushes, killed some coalition soldiers in the Al-Nasiriya area of southern Iraq. Other difficulties included Iraq's capture of a handful of U.S. soldiers, the accidental downing of a U.K. aircraft by a U.S. missile, and a grenade attack on forces in Kuwait blamed on a Muslim U.S. soldier.

U.S. President George W. Bush and U.S. military officials said the Iraqi regime ultimately will fall, but warned of tougher fighting to come as U.S.-led forces advance on Baghdad.

Day-to-day developments in the war aside, the long-term trend for oil prices is still seen as down. But heavy selling in recent sessions has left the market vulnerable to spikes, analysts said.

"Any setbacks at this point could generate a rally in an oversold market," Cameron Hanover analyst Peter Beutel said Sunday. "I don't see the price going back over $40, but these rallies will be sharp - they won't be timid affairs."

Another potentially bullish development emerged in Nigeria Sunday, when ChevronTexaco Corp. (CVX) shut down 440,000 barrels a day of oil production in the western Niger Delta due to ethnic violence. Royal Dutch/Shell (RD) and TotalFinaElf (TOT) have also shut in some production there, leaving 28% of the country's 2.2 million barrels a day in output off line.

Light, sweet crude futures closest to expiration fell below $27 a barrel Friday on the New York Mercantile Exchange after hitting a Feb. 27 peak near $40.

U.S. government and oil-industry analysts said that major oil producers' increased exports would fill any supply gap created by the loss of Iraqi oil production and that a short war would lead to a relatively quick resumption of Iraqi oil exports. Until the weekend, developments hadn't challenged that view.

Hoping For The Best

Last week, Merrill Lynch analysts summed up the market's optimistic sentiment, saying, "The general retracement we're seeing in oil prices reflects the hope for a 'perfect storm' of sorts where Iraq's infrastructure goes largely unscathed and no other supply dislocations develop from a war."

A key concern for the oil market is not only whether the coalition takes Baghdad, but whether Iraq's roughly 2,000 oil wells are quickly secured with minimal damage. Iraq's oil-export operations have shut down since U.N. officials left the country and buyers dried up as war ensued.

Only a handful of Iraqi oil wells were known to be damaged Sunday, and southern fields were under U.S. and British military control, but coalition forces still hadn't secured the country's rich oil fields in the north.

For now, the oil market appears adequately supplied. The Organization of Petroleum Exporting Countries has increased its oil output to 26.5 million barrels a day - just 400,000 barrels a day below the level that preceded Venezuela's two-month general strike, according to the U.S. Department of Energy's statistical arm. The increase comes despite the loss of Iraqi oil production and some lost output in Venezuela and Nigeria, the Energy Information Administration said Friday.

Barring a major disruption in the Middle East beyond the lost Iraqi production, some industry analysts expect oil prices to end the year around $25 a barrel in New York.

"There's definitely still potential for upside risk, but in my view that thought process has been overblown," Jacques Rousseau, senior analyst at Friedman, Billings, Ramsey & Co. Inc., an institutional brokerage, research and investment banking company, said Friday. "Any time the world has enough time to see something like this coming, they get prepared."

Rousseau projected the U.S. oil price will drop from about $35 a barrel in the first quarter to $26 in the second, ending the year around $23.

Nigeria A Wild Card

Erik Kreil, the EIA oil analyst who updated the agency's OPEC supply report Friday, said oil prices are now at the bottom of the range justified by supply and demand fundamentals.

"When we look at what the fundamental price should be based on inventories, $27 would be a fair number," Kreil said. "A price of $28 to $30 is what we would have said, based on inventories and other market fundamentals."

U.S. commercial inventories of crude oil remain near a 27-year low at 270.2 million barrels, just above the level at which the EIA said refiners could experience supply or production difficulties.

Commercial crude stocks remain low primarily because U.S. oil prices above $30 a gallon this year were too high to risk holding inventories, not because oil isn't available to store, analysts said.

A seasonal decline of about 2 million barrels a day in world oil demand is expected in spring, allowing U.S. refiners to begin restocking ahead of the summer driving season, Rousseau said.

Venezuela, a key OPEC producer, has already restored its oil output to at least 2.4 million barrels a day, nearing the level that preceded its strike that began in December. The recovery occurred faster than most had anticipated, easing concern that war in Iraq would mean the simultaneous loss of two major OPEC members' oil.

But with U.S. oil inventories stretched tight and producers nearing the limits of their capacity, there is little margin for error in the event of further disruptions, like those in Nigeria, the fifth-largest source of U.S. oil imports in 2002.

Nigeria's low-sulfur, or "sweet," crude is valued for the high quantities of gasoline it yields. A prolonged disruption of Nigeria's output could drive up U.S. gasoline prices, which reached a record high of $1.728 a gallon on March 17, Kreil said.

"There isn't a large source of light, sweet crude substitute waiting to come on for Nigeria," Kreil said. "If it continues to worsen, that's definitely going to be a concern for gasoline."

Beyond the war uncertainties and Nigerian disruption, Rousseau said the pace of economic recovery will reclaim its prominence in oil-market psychology. If U.S. economic growth this year is below normal as forecasts indicate, demand for oil and refined products will follow suit and apply downward pressure on prices, Rousseau said.

-By Stephen Parker, Dow Jones Newswires; 201-938-4426; stephen.parker@dowjones.com