<a href=news.ft.com>Total shutdown By Carola Hoyos, Energy Correspondent, in London Published: March 24 2003 21:44 | Last Updated: March 24 2003 23:20

Setbacks suffered by US and UK troops on Iraq's battlefield on Monday turned the optimistic mood of the oil markets round, pushing prices higher in London and New York.

Unrest ahead of the presidential election in Nigeria, which has halted 40 per cent of the oil production of the African nation, added to the concern.

But traders were most focused on the Middle East where the market had been betting on a short war with few casualties, causing prices to drop to four-month lows. But that mood was sharply different on Monday.

In London on Monday afternoon Brent crude was up $1.35 at $25.70 a barrel, while the US benchmark traded at $28.15 a barrel, up $1.24 on the day, but still significantly below last month's high of $39.99.

"I think Iraq is the issue on everyone's mind, although Nigeria has been lurking in the background," said Fadel Gheit, analyst at Fahnestock, the US-based securities firm.

Royal Dutch/Shell on Monday said violent unrest in Nigeria had forced it to halt 320,000 barrels per day of its production.

The news came after ChevronTexaco at the weekend closed its main export terminal and France's TotalFinaElf pulled out of an oil storage facility that came under attack. The loss in production from the crisis on Monday totalled 767,500 barrels a day, 40 per cent of the daily exports of Africa's largest oil producer.

For Shell and ChevronTexaco the loss of production has been damped by increased production from other fields and the fact that the Organisation of Petroleum Exporting Countries in the past few months has not prompted Nigeria to restrict its production levels. However, if the disruptions continued over several quarters, they would begin to cut into the companies' earnings, said Mr Gheit.

From a global perspective, the timing of Nigeria's troubles has mitigated their effect. Venezuela, another Opec member whose political strife recently affected its oil production, appears to have managed to restore much of that output more quickly than had expected.

Meanwhile, the approach of spring in the northern hemisphere has reduced demand for heating oil, while Saudi Arabia, the world's largest exporter of crude oil, has sent extra barrels to its main consumers.

Nevertheless, a total shutdown of Nigeria's exports and images of scores of burning oil wells in Iraq would almost certainly lead to a quick rally in prices, analysts said.

<a href=www.upi.com>The Bear's Lair By Martin Hutchinson UPI Business and Economics Editor From the Business & Economics Desk Published 3/24/2003 6:05 PM

WASHINGTON, March 24 (UPI) -- Once Saddam Hussein is defeated, the U.S.-led coalition that has defeated him will have its most difficult economic decision: what to do with Iraq's oil revenues, to ensure that they benefit the Iraqi people as a whole, rather than simply fueling a destructive and greedy government machine.

It's a difficult problem. Of all large-scale revenue sources, oil has proved itself the most destructive to the quality of local governments and the welfare of local peoples.

Examples abound. Venezuela, in spite of being a democracy and relatively well-off, has been appallingly run since the 1950s, completely failing to develop a viable non-oil economy. Mexico, one of the world's wealthier countries in 1945, declined into an orgy of corruption owing to its oil wealth, with the worst corruption coming during the 1970-82 period, when oil was at its most valuable. Indonesia, while a dictatorship, was a beacon of Asian success until President Suharto's last years, but has descended into a mire of corruption since the middle 1990s. Since Suharto's departure in 1998, none of his three democratically elected successors has shown any ability to make the Indonesian economy work.

And then there's Nigeria.

There aren't a lot of favorable counter-examples. Tiny countries like Kuwait, Dubai and Qatar do OK, proving that if you have ENOUGH oil wealth -- say $100,000 per annum per head of population -- you can manage to avoid dissipating it. Even Saudi Arabia, the world's oil-wealthiest country, saw its per capita gross domestic product decline from $25,000 to $7,000 from 1980 to 2000, proving that in spite of the Suharto example, autocracy is no cure for oil-financed corruption. Britain, Norway and Russia have shown that oil wealth in modest quantities can be a boom, but all three countries had strong non-oil economies before the oil wealth appeared (in the case of Britain and Norway) or a huge non-oil sector that co-existed alongside it (Russia).

It is pretty clear therefore that simply removing Saddam and installing a democratic government will not ensure good government in Iraq. Since the country has the world's second-largest oil reserves and only a weak non-oil economy, there is no chance that it will follow the path of Britain, Norway and Russia, and every likelihood that even a democratic Iraq will become a second Venezuela or Nigeria, failing to enrich its people and squandering the money in worthless government projects and unbounded corruption. And, of course there remains the possibility that such an Iraq will continue at some level to sponsor terrorist activity.

So what are the alternatives? Until last Monday, under the 1995 "oil-for-food" program, Iraq's oil revenues were handled by the United Nations. This rendered a large portion of the Iraqi population -- some 14 million out of the country's population of 24 million -- dependent on handouts from the U.N.'s relief administrators. As the citizens of the Berkshire village of Speenhamland found out in 1795, a pure handout program of this kind, in a society that has a high poverty level and considerable social dislocation, simply creates dependence and reduces economic activity. Naturally, the "oil for food" program has also done nothing for Iraq's agriculture. While possibly a necessary (if ineffectual) remedy at a time Iraq was subject to international sanctions, U.N. administration of Iraq's principal source of foreign exchange earnings is bound to cause huge political and economic trouble going forward.

Another possibility would be for the oil revenues to be administered by the World Bank or the IMF, which would use them to pursue a carefully thought out development strategy according to the governing policies of the international institution concerned. This has two problems. First, it would be perceived in Iraq as an exercise in U.S. imperialism, since the World Bank and IMF are perceived in the Third World, rightly or wrongly, as instruments of U.S. policy. Second, it would provide no tangible benefits for the Iraqi population themselves (other than by U.N.-type handouts, which have the problems outlined above) but would simply provide a huge "gravy train" for the international institutions and their associated consultants, by which the money will be wasted on ineffectual projects, while the true needs of the population go unmet.

If you think I'm exaggerating, consider Bosnia, a relatively prosperous country with a good education system before 1991, into which tens of billions of dollars of international aid have been poured, without any sign of having created a viable economy. The reason for this is quite simple: The international aid agencies, bound by their own agendas, paid little attention to the needs of the Bosnians themselves. In every other country that broke away from the former Yugoslavia, one of the first orders of business was to provide a mechanism to restore to the populace their foreign currency savings, which had been expropriated by the Yugoslav National Bank in 1991, and used to fund the Serbian war machine. Once this had been done, new business formation and the restoration of a functioning economy were once again possible, since these savings were of course the main source of small business financing. In Bosnia, the problem was ignored by the aid agencies, and by the government they controlled, and the small business sector is consequently notably absent from the current Bosnian economic scene.

The central problem in all the above schemes for spending Iraq's oil revenues is that they depend on a central Marxist fallacy: that the oil under a country, and the oil production issuing from the country, are rightfully the property of that country's government.

This is equivalent to nationalizing the U.S. semiconductor industry, on the grounds that the U.S. government had provided for the education of William Shockley and his successors who invested in the various devices involved. The principle makes no sense economically; still more does it make no sense morally.

In economic reality, there are two groups of people who have a right to the revenues from Iraq's oil industry: the oil companies that developed it, and the owners of the land under which the oil was discovered. In the event that private property rights were undeveloped in the region when the oil was found, the latter ownership devolves, not on the Iraqi government, but on the Iraqi people themselves.

The majority of Iraq's oilfields were developed by the Iraq Petroleum Corp., a consortium founded in 1925, and owned by British Petroleum (23.75 percent) Shell (23.75 percent) Compagnie Francaise des Petroles (23.75 percent) ExxonMobil (23.7 percent, between the two constituent companies) and the late Nubar Gulbenkian, the famous "Mr. Five Percent" wheeler dealer, owner of that percentage of the company. IPC was partially expropriated in 1964 and fully nationalized in 1972, the latter by a government of which Saddam was already the guiding figure.

There would thus seem no reason to recognize the expropriation, and every reason to return the operation of the oilfields to the British, Anglo-Dutch, French, U.S. and Portuguese (the Gulbenkian Foundation, domiciled in Lisbon) entities whose rights were so brutally overruled by Saddam's thugs. The Iraq National Oil Company, a corrupt tool of the Saddam regime, can legitimately be cut out of the business.

It is also however clear, through examination of current operating agreements in the oil industry, that the great majority of the oil revenues, perhaps 75 percent to 80 percent, should accrue to the landholders, in this case (subject to any well-founded title claims by individuals on particular oil fields) to the Iraqi people as a whole -- NOT to the government. By ensuring that oil revenues accrue to individual Iraqis, not to their government, the coalition can provide the Iraqi people with a huge tangible benefit from the invasion, and spread the money widely enough so that any funding for terrorism or a military machine is insignificant.

The requirement therefore is for a fund that holds the money, and that contains individual accounts in the name of the Iraqi people, who derive benefit from their holdings and have at least some degree of control over the way the money is invested. Fortunately, there is an excellent model for such an entity: Singapore's Central Provident Fund, with currently 2.9 million members and assets of $45 billion.

The CPF was set up initially in 1955, but its growth dates from 1968, when by a provision of Singapore law a percentage of every employee's salary (currently 20 percent paid by the employee plus 16 percent paid by the employer) up to SGD 6,000 ($3,000) per month is paid into the fund, to accrue in solid investments and pay for the employee's future retirement, health and later housing (by means of home mortgage withdrawal) needs. The fund's investments are managed by trustees, who provide "a fair market return at minimal risk" which is linked to bank deposit rates. However, fund members may also choose their own investment vehicles from an approved list for their accrued fund balances.

Iraq's short-term potential oil production is around 2.5 million barrels per day, with the possibility of an increase to 3.5 billion barrels per day within 3-5 years from investment in new fields. At an oil price of $25 per barrel, with 80 percent of oil revenues devoted to the fund, an Iraqi CPF would have initial revenues of $18.25 billion per annum, or $760.42 for every Iraqi man, woman and child. In addition, going forward, a portion of employed Iraqi's earnings, maybe 10 percent, could be added to his account in the fund.

Over a period of years, as the fund's revenues and assets grew, this should prove sufficient to provide the Iraqi people with basic retirement, health and unemployment benefit needs, as well as educational services for Iraq's children. It would best be managed by the staff of Singapore's CPF, who have 35 years experience in running this type of scheme, and are as far as humanly possible incorruptible (Singapore ranked fifth-lowest in the world, after three Scandinavian countries and New Zealand, in Transparency International's most recent annual corruption rankings.)

By instituting an Iraqi CPF, with individual accounts, funded by the oil revenues, and managed by staff of the Singapore CPF, the coalition would over a 2-3 year period allow the Iraqi people to develop an asset over which they had (if they wished) individual investment control, which would fund their basic social program needs. The new Iraqi government, in turn, would have to depend on non-oil sources, such as sales and income taxes on the Iraqi people for its revenues. It would thus be relatively impoverished, but would also have no need to provide basic social security, health or education services for its people. With at most 10 percent of Iraq's GDP under its control, it would be unable to afford expensive military adventures, would have very limited control over the Iraqi economy, and relatively few and minor avenues for serious corruption.

An Iraqi people who had their basic social security, health and education needs taken care of by a Central Provident Fund managed by incorruptible and capable Singaporeans, and whose government was modest and not very corrupt, would be the happiest polity in the unhappy Middle East. That, at least, is something worth fighting for.

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(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

Times Analysis March 25, 2003 Business Editor's Commentary by Patience Wheatcroft

IIRRATIONAL exuberance rarely comes in quite so pronounced form as it did last week. Even allowing for the extraordinary enthusiasm for worthless internet stocks that led Alan Greenspan to resort to the phrase, the seven consecutive days of rises that the stock market experienced had not been seen in 40 years.

And they were completely irrational. Celebrating the start of war with a flurry of investment in the equity market might have obeyed the historical precedent but it lacked logic. It might have been a bet on a positive outcome to a short, sharp war but that was to ignore the underlying problems that beset so many companies and those investors who have traditionally put their money into equities — the pension funds.

The oil market is just as crazy as shares and could become even more dangerous. It is tempting to believe that price movements are being driven by genuine changes in demand and supply, or potential disruption to supply. Such factors might help to explain the 50 per cent rise in prices between November and early March, as users stocked up for war and Venezuela’s two million barrels per day were stopped by strikes. They might even explain yesterday’s $1.5 per barrel surge. The war suddenly looked longer and, for seemingly unrelated reasons, 800,000 barrels are being lost from Nigeria, a key source of oil for America.

If that were the test, however, it would be hard to explain why oil prices crashed to a four-month low in the first few days of conflict, even if Venezuelan output is gradually coming back into play.

In reality, oil prices, like share prices, are being driven by follow-the-trend speculators and “directional” hedge funds, who are eclipsing the power of Opec as they have that of regular institutional investors. Once a trend has run its course, as the oil price falls and share price rises clearly had by the weekend, traders are looking for an excuse to turn round and head the other way.

Random huge swings in oil prices are not just hopelessly damaging to producers. They can switch growth in the world economy off or on. Given that those oil producers that can produce have little spare capacity left, it would not be amazing to see traders attempt another uptrend in the price.

Over time, however, trend-following in the oil market is something of a zero-sum game. Even if prices were driven only by “real” trades, the market would be cyclical. On the stock market, such trend following can bring a change in investment behaviiour, as it has in recent years in Japan. For decades, we have expected share prices to follow a long-term upward movement, in line with output and profits, even if they occasionally move too fast and too far and have painful corrections. If the directional speculators remain in charge, however, as they have in Tokyo, share prices start to be essentially cyclical. If that happens, even the most most sober long-term pension funds begin to think in terms of getting in and out of shares, as many traded in and out of bonds during the decades of inflation.

That is the opposite of what British businesses need if they are to stand a chance of improving their competitiveness and thus generating better long-term returns for investors. As the CBI highlighted yesterday, with next month’s Budget in mind, British companies are failing to invest in machinery and equipment. The level of investment fell by 12.7 per cent over the past two years, the greatest decline of any of the G7 countries. The CBI wants more tax credits for research and development to help to stimulate an improvement. Even more important though would be incentives to encourage investors in companies to take a long-term approach.

Serious money for serious results

LAST Friday Simon Group announced that Michael Davies “has decided to retire”. A sensible decision, one might have thought, given the company’s miserable performance in recent years and the admission that, after 13 months of trying to find a buyer, it had been forced to abandon hopes of negotiating a deal.

But far from apologising to shareholders and bowing out, Davies is negotiating a payoff. Even as the shares sank to a 30-year low, he was of the view that his one-year contract entitled him to compensation. Some might feel that he had already done rather nicely for a non-executive chairman of a shrinking company. Last year he collected £113,000 but the year before his take had been swollen by a bonus of £193,000, the fifth and final instalment in an unusual bonus scheme negotiated back in 1994, when Simon had been in financial difficulties.

Timothy Chadwick, the new chairman, acknowledged the fact that Davies had seen the port operator through that tricky period. However, he added that: “I am confident that with a new team and sharper focus, we are well placed to grow shareholder value.” That implies there might of late have been a lack of focus under Mr Davies, who is approaching 70. He had certainly found time to sit on plenty of other boards. He was until recently chairman of National Express and Corporate Services Group and a non-executive director of British Airways. He remains chairman of National Express.

Shareholders might resent having to continue paying him a salary in his retirement.

But presumably Davies takes the view that there is no harm in asking for more, since boards generally pay up without protest. At the housebuilder Persimmon, the chief executive John White reckoned that he should not give up his two-year roller for nothing, so he is being compensated to the tune of £1.2 million. Other directors who still enjoy the benefit of contracts longer than the one year which corporate governance best practice decrees appropriate will no doubt support White’s case. Granada directors were compensated when their contracts were reduced from three years to two but, rather than send investors another bill, the chairman Charles Allen has held on to his two-year roller, despite protests from investors.

Unless investors press their case more vigorously, they will continue to find that they are overridden. The message that they need to instil into boardrooms is that they are happy to see executives remunerated handsomely for good results. But rewards need to relate to what shareholders experience.

An example of cluttered thinking

A NEW survey concludes that office staff spend almost three hours a day unproductively. From this information, the survey was able to conclude that wasted time in the office was costing employers more than £150 billion a year.

The organisation responsible for providing this information is learndirect, a purveyor of online education in need of a lesson in the use of capital letters.

Six weeks ago, this same organisation declared that 57 per cent of people had nightmares about work, a quarter of those bad dreams occurring on Sunday nights as the nation braced itself for Monday morning. This insight into an over-stressed workforce was the result of another survey. So was the information, published a couple of weeks later, that more than one in four members of the workploace rated their boss as either “incompetent”, “disinterested” or “a dictator”. Thanks to learndirect, we now know that 93 per cent of people rate “strong, inspirational leadership and professional encouragement” as the most important qualities in a boss.

Perhaps some of the time being spent so unproductively by office workers is being used to answer silly questions from learndirect. There is, after all, serious work to be done by this publicly funded body. It was set up under the auspices of the University for Industry, the vehicle through which the Government set out to encourage people to keep on learning throughout their lives.

A noble cause belittled by such nonsense as the patronising exhortation to celebrate the start of spring with a desk-detox. “A messy desk is very demotivating,” according to Helen Milner, learndirect’s director of operations. So her government-funded organisation enlisted the services of one Dawna Walters who, apparently, presents a BBC Two programme called Life Laundry to produce a guide to . . . tidying your desk.

Few would deny that there are inefficiencies in offices, although whether they cost £150 billion is debatable. There can be no doubt, however, that learndirect is wasting public money on silly stunts that will do nothing to improve literacy and numeracy levels in the country.

LAST night Michael Howard, Shadow Chancellor, dissected Gordon Brown’s attitude to reform of public services generally and the health service in particular. He concluded that the Chancellor’s conviction that there had to be a centralised state monopoly in healthcare meant the increased funds being pumped into the NHS would not produce commensurate improvements. What hope for consumer choice from a Chancellor who reached 6,086 words in a speech on the subject before saying: “Finally, choice . . .”?

<a href+http://www.forbes.com/business/newswire/2003/03/24/rtr916669.html>Reuters, 03.24.03, 4:41 PM ET By Richard Valdmanis SAN ANTONIO (Reuters) - The United States' drive to increase its energy independence could backfire by hurting the U.S. economy and creating political instability in countries which depend on oil export revenues, a top Saudi Arabian oil official said Monday. "Such a direction is characterized by disengagement, risk of economic stagnation, accompanied by instability in parts of the world," said Sharaf Salamah, the president of Saudi Refining. The Bush administration has said it wants to increase domestic U.S. energy supplies to lessen its growing reliance on imports, which supply more than half of U.S. oil needs. Saudi Arabia, the world's largest oil producer, was the biggest supplier of crude oil to the United States last year, sending more than 1.5 million barrels daily. "The U.S. is one of the most important economic markets for our exporters and, in fact, our producers are more dependent on export revenues than the United States is on what it imports," Salamah said at the annual National Petrochemical and Refiners Association meeting in San Antonio. Saudi Refining owns 50 percent of U.S. oil refining firm Motiva Enterprises LLC. U.S. crude oil prices rose to 12-year highs near $40 a barrel less than a month ago as a two-month oil strike in key South American supplier Venezuela and a cold northern winter strained supply. Dealers also feared war in Iraq could upset supplies from the Middle East which ships 40 percent of the world's oil exports. Oil prices have since fallen below $29 after Saudi Arabia raised production to make up for lost Venezuelan supply. The dramatic moves in oil prices have raised hackles in the world's largest energy consumer, where retail gasoline prices recently hit a record high at $1.72 a gallon, well before peak demand summer driving season. Saudi Arabia has assured oil markets that it could further increase its output if required to stabilize prices. "Saudi Arabian oil policy rests on two main pillars, to maintain market stability to support the world economy, and encourage equitable oil prices to support the Saudi economy, which the Saudi Arabian government is working hard to diversify," Salamah said. "We continue to monitor the situation and are fully prepared to take appropriate action as necessary. To fulfill the promise of supporting the market's stability, Saudi Arabia currently maintains over two million barrels per day of surplus production capacity," he said. Salamah, who was chosen to speak at the NPRA conference after Saudi Oil Minister Ali al-Naimi canceled his trip due to the onset of war, said that Saudi Arabia's commitment to ensuring a stable oil market eliminated the need for U.S. energy independence. "The concept of self-sufficiency has been discounted a long time ago as part of the move toward a global society... where each nation specializes in what it does best," Salamah said. "This is the recipe for economic optimization."

Reuters, 03.24.03, 4:12 PM ET By Manuela Badawy and Barbara Lewis NEW YORK/LONDON, March 24 (Reuters) - U.S. oil refiners are scrambling for alternatives to crude supplies lost from strife-torn Nigeria, eager to avoid being caught short as gasoline demand rises for summer, traders said on Monday. While there is plenty of lower-quality crude available on international markets, it is Nigerian crude's high gasoline yield that refiners will miss as the oil industry seeks to step up gasoline production for the vacation driving season. Energy multinationals ChevronTexaco (nyse: CVX - news - people), Royal Dutch/Shell <RD.AS> <SHEL.L> and France's TotalFinaElf <TOTF.PA> have shut most of their operations in the country's oil-rich Niger Delta with total losses of 817,000 barrels per day (bpd), or 37 percent of the West African country's 2.2 million bpd production. "The enhanced instability may continue for a considerable period, and we would not count Nigerian production as being a secure supply source for a while to come," said Paul Horsnell, oil analyst at J.P. Morgan in a research note. Refiners' options have already been restricted by supply disruptions in Venezuela since December and the loss of Iraq's crude exports last week as the U.S.-led forces launched a military offensive against Baghdad. Heavy shipments expected from Saudi Arabia in the coming weeks have yet to roll into U.S. storage tanks as U.S. crude inventories wallow near 25-year lows. Saudi supplies will in any case be heavier and higher in sulphur, or more sour, than the Nigerian light, sweet crudes which are good for making gasoline. As a result, prices are rising sharply for the U.S., Latin American and North Sea crudes that refiners can use as alternatives. Nigeria is one of the top six oil exporters to the United States, sending more than 560,000 bpd last year. "We are getting a knock-on effect on the domestic grades. Light Louisiana Sweet differentials for both April and May have strengthened, the (Colombian) Cusiana market will firm and (the disruptions) will support North Sea differentials," a U.S. crude trader said. FORCE MAJEURE The Ijaw ethnic group at the center of Nigeria's tribal violence and an army crackdown that led to the shutdowns vowed to strike in the eastern half of the delta if soldiers attacked them. Oil industry officials said they feared the a growing military campaign could further inflame the situation if the army launched reprisal attacks over the killing of a dozen soldiers by militants in recent weeks. Shell and ChevronTexaco have declared force majeure on Bonny Light , Forcados and Escravos oil exports from March 22, with expected delays on Bonny Light of up to five days and Forcados loadings by three to 14 days, depending on the cargo. U.S. refiner Sunoco (nyse: SUN - news - people), a steady buyer of Nigerian crude, has already turned to the depressed North Sea market to replace the lost barrels with Norwegian Ekofisk , a sweet crude, traders said. The heavy volumes expected from Saudi Arabia, which already stepped up production sharply this year to make up for the shortfall from Venezuela, make the loss of Nigeria's supply manageable as long as it does not drag on. "The market was so bearish, it needed something like this," a crude trader said. "Now sellers are going to be a bit more proud of their cargoes and push up differentials." But with U.S. refiners looking to ramp up gasoline production in coming weeks ahead of summer, they will be anxious to replace any lost Nigerian cargoes quickly. "Anybody who had something loading this week is going to be looking for some substitute. They could look to the North Sea where there is plenty of April-loading crude available," a North Sea trader said. Substitute cargoes from the North Sea take 12 to 13 days to reach U.S. shores compared to the 15-day voyage from Nigeria. Refiners have the advantage that Latin American and North Sea grades have both been weakening before news of the Nigerian problems. Prices for Colombia's sweet Cusiana dropped about 30 cents from the previous month, while UK and Norwegian crude differentials having fallen by as much as 60 cents in the past week. The spread between U.S. benchmark West Texas Intermediate crude and North Sea Brent has been around $2.50 in recent days, wide enough to make the shipment across the Atlantic economic for some grades, dealers say. Cheaper shipping rates have also encouraged transatlantic shipments.