US confident Opec can make up lost oil exports

By Carola Hoyos in London Published: March 20 2003 11:22 | Last Updated: March 20 2003 21:07

The US on Thursday sought to reassure the nervous oil market by expressing confidence that the Opec oil cartel could make up for the loss of Iraq's exports.

Spencer Abraham, the US energy secretary, said that the US was not tapping its emergency oil stockpile and that world supplies were "more than adequate to compensate for any disruption".

Just hours later Opec announced that it would permit its members to ignore their quotas and tap into their spare capacity.

The statement was seen as largely a public relations exercise as most Opec members are already producing above their quota and at their maximum capacity.

The US decision not to dip into the 600m barrels of stocks was in contrast to the last Gulf war. On the day airstrikes began in 1991, the US announced it would sell 33.75m barrels of its oil and sent the oil price tumbling more than $10 a barrel.

"You don't want to use it too early," said Joseph Stanislaw, president of Cambridge Energy Research Associates, pointing out that in 1991 the US decision to tap its inventories was delayed, coming five months after Iraq had invaded Kuwait.

So far the US and the 25 other members of the International Energy Agency, which co-ordinates international stock releases, believe the Opec oil cartel and in particular Saudi Arabia are able to make up for the interruption of Iraqi exports.

Claude Mandil, the IEA's executive director, said yesterday: "Producers are confident they can keep the market adequately supplied and we have been assured that they will make every effort to do so."

But movements in oil prices on Thursday highlighted the volatility that the war could cause when news surfaced that the Iraqi regime may have begun to sabotage their oil fields.

Donald Rumsfeld, US defence secretary, on Thursday said the Iraqi regime may have set fire to three or four oil wells in the south of the country. He said: "It is a crime for that regime to be destroying the riches of the Iraqi people."

The allegations, which were denied by Iraqi officials, initially pushed benchmark Brent oil prices up 75c to a high of $27.50 a barrel.

But prices reversed their gains as doubts over the veracity of the claims grew and traders continued to believe it would be a short war.

If that assumption is proved wrong, prices could yet surpass the $39.99 high the US benchmark hit last month, analysts said. Much will also depend on whether Thursday's allegations of the well fires indicated the beginning of a sustained scorched earth policy, in which case it could take years rather than months for Iraq's oil exports to return to the market after the end of the war.

Iraqi Oil Sabotage Concerns Loom in War

By BRUCE STANLEY The Associated Press Thursday, March 20, 2003; 5:37 AM

Saddam Hussein may have organized a meticulous plan for sabotaging Iraq's oil fields in a scorched-earth tactic designed to cripple Iraqi production.

The oil industry has buzzed with reports in recent weeks that Iraqis are rigging their wells with explosives, hoping to slow a U.S.-led attack and making the country's oil wealth worthless for any new government.

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

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

In 1991, Iraqi troops needed just a few days and some plastic explosives to destroy more than 700 well heads and turn Kuwait's occupied oil fields into a desert inferno.

A loss of oil from Iraq - home to the world's second-largest oil reserves - could crimp supplies for importing countries, including the United States, which depends on Iraq for 2 percent of all the crude it consumes.

However, both Saudi Arabia and Venezuela have pledged to keep the oil flowing in wartime.

Oil exports are also a major source of the money that would be needed to pay for Iraq's reconstruction after a war. Because of their strategic importance, the Defense Department says it will try to secure Iraq's oil fields quickly to prevent Iraqi forces from damaging the country's 1,685 wells.

When Iraqi troops retreated from Kuwait in February 1991, they attached plastic explosives to well heads and piled sandbags against them to direct the force of the explosions for maximum effect.

The result was geysers of burning crude at 603 wells, serious damage at more than 100 others and widespread environmental degradation. Teams of firefighters from the United States, Canada and eight other countries worked from April until November to put out the fires.

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

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

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

It took Kuwait more than two years and $50 billion to restore its oil output to prewar levels. If Iraq sabotaged its oil fields, any cleanup could take far longer and cost much more.

Iraq's fields and pipelines are badly run-down after 12 years of U.N. economic sanctions. Its fields are also much farther from the sea than those in Kuwait, meaning a ready source of water might not be so easily available.

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

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

Even if the Iraqis did booby-trap their oil fields, Manouchehr Takin, an analyst at the Center for Global Energy Studies, said Saudi Arabia, Venezuela and other OPEC member countries could increase production to offset Iraq's 2 million barrels a day in exports.

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

Brown & Root Services of Houston has drawn up a plan for the Defense Department for containing and assessing any damage to Iraqi oil installations, but the Pentagon so far has awarded no contracts.

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

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

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

Oil extends a week-long slump - Prices swing lower as dealers continue to predict an easy victory for the U.S. in the Iraq war.

March 20, 2003: 5:27 PM EST

NEW YORK (Reuters) - Oil prices Thursday afternoon lost gains notched earlier in the day, as the United States launched a widening offensive on Iraq and dealers predicted an easy victory for Washington.

Prices swung wildly during the day on reports, denied by Baghdad, that three or four oil wells were on fire in the south of the country.

OPEC exporters said they could fill any supply gap from the conflict in the oil-rich Gulf, and said markets already were well supplied. The West's energy watchdog, the International Energy Agency, said it saw no reason to release emergency stocks.

Shortly after 2:45 p.m. ET, light crude for May delivery settled $1.24 lower at $28.12 a barrel on the New York Mercantile Exchange, after rising as much as 76 cents on reports of oil well fires in Iraq.

Benchmark Brent crude oil fell $1.25 to $25.50 per barrel in London, having touched a three-month low of $25.30.

Oil has shed a quarter of its value in the last week on a massive bet by investment funds that war will end quickly, without causing major damage to oil installations.

"The war premium is diminishing on a growing certainty that coalition forces will prevail," said Peter Gignoux of Schroder Salomon Smith Barney.

Hours after U.S. cruise missiles hit targets in Baghdad, officials in neighboring Kuwait said oil output was normal, despite two Iraqi missiles hitting the north of the country.

Oil tanker traffic from the Gulf, which provides 40 percent of world oil exports, also was running smoothly, shippers said.

U.S. Defense Secretary Donald Rumsfeld said he had indications Iraq may have set fire to some wells, but Reuters eyewitnesses said there were no signs of fire at oil fields close to the border with Kuwait.

Iraq stopped exporting oil from its southern fields earlier this week, when United Nations inspectors left the country. Limited exports continued Thursday through a pipeline to the Turkish Mediterranean.

Heating oil for May delivery fell 2.51 cents to 75.9 cents a gallon. May unleaded gasoline price lost 3.76 cents to 89.59 cents a gallon.

War with Iraq may have little impact on oil prices

Thursday, March 20, 2003 By MICHAEL LEMANSKI Norwich Bulletin; mlemanski@norwichbulletin.com

Given the way a Middle Eastern leader's mild case of indigestion seemingly causes pump prices to fluctuate, it's reasonable to expect oil prices to rise when bombs fall on Iraq. Not so, according to the American Automobile Association.

"They don't expect anything to happen in terms of prices," said Fran Mayko, spokeswoman of AAA's Hamden office. "There are projections of higher prices, but it's hard to project at this point.

"There is absolutely no reason to rush to the gas pumps when war is declared."

Locally, gas prices are higher than a month ago -- and way higher than a year ago.

But, according to experts, it's due to a variety of factors ranging from war jitters, labor strife in oil export giant Venezuela (now settled), and a very cold winter.

Throw in the fact the U.S. gets most of its imported oil from Saudi Arabia, Mexico, Canada, Venezuela and Nigeria, Mayko said logic dictates an Iraq war will not harm U.S. supplies.

Proving that point Wednesday was the crude oil markets on the New York Mercantile Exchange. For the first time in months, crude oil was below $30 per barrel at $29.88, down from a high of $40 this year.

Still, Mayko points out, if people think gas is an issue and rush out to buy it after the "special reports" start appearing on TV, gas problems could be a self-fulfilling prophecy.

"That, right now, is the biggest worry," Mayko said, adding war jitters sometimes are worse that the war itself. "I think so. I think speculation has a lot to do about gas prices."

In short, Mayko said, motorists shouldn't panic when the bombs drop and fill up. If they do, supplies will be temporarily low, a condition that has already happened in southern California, she said.

"If people start to panic, it's only going to create problems and needless fuel shortages," Mayko said.

Local concerns

For example, in eastern Connecticut Tuesday, there were no signs of panic, but motorists were wandering the highways looking for the best gas deals, which are - on average -- up a nickel from a month ago and up 49 cents from a year ago.

Generally, the best prices -- under $1.70 -- can be found in Willimantic, Jewett City, and a couple of Brooklyn gas stations (along Route 6). Although some scattered, less than $1.70 stations, may be around.

The lowest price, apparently, was the Willimantic Xtra Mart on Main Street, which was $1.65 per gallon Tuesday.

For Brooklyn resident Tony Cataldo -- a physical therapist whose house calls put him on the road often -- high gas prices mean a drop in income.

"Theoretically, it cuts into what I make," Cataldo said Tuesday, filling up on $1.73 per gallon gas at the Brooklyn Xtra Mart on Route 6.

Norwich attorney John M. Newson said his 1993 Corvette requires ultra unleaded, which costs $1.97 per gallon at the Norwich Sunoco station on West Town Street, where he was filling up Tuesday.

He said the high fuel costs are making it more expensive to drive.

"It's high, but I remember a couple of summers ago. It was a little over $2 a gallon," Newson said, adding high prices are a tiny sacrifice for people to make. "If that's what is going to happen, then, I guess, we're going to have to deal with it. When you buy a car like this, it's going to cost you more money."

As for the consequences, Norwich gas station attendant Patel Anup -- whose family owns the West Town Street Sunoco -- said the war could hurt his family, especially if travel habits dwindle.

"Every week it's going up by 3 cents," Anup said. "You're losing because if people don't drive, it's not a good thing."

This is a transcript from The World Today. The program is broadcast around Australia at 12:10pm on ABC Local Radio.

The World Today - Thursday, 20 March , 2003 12:50:23 Reporter: Stephen Long

JOHN HIGHFIELD: And for the broader Australian economy, and particularly motorists, some good news in these dark times we're experiencing.

The huge premium which has been built into oil prices over recent weeks has been one of the first casualties from this suggestion of war. But West Texas Intermediate Crude has lost more than a dollar a barrel in its value overnight, the fifth straight day of falls in the oil price.

Spot prices well below US$30 a barrel have been seen in recent trading in the last few hours. That's down by more than 25 per cent on the 12-year high of nearly US$40 just a few weeks ago. Commodities analysts are saying it could well fall further in the short term.

But leading economists also remain concerned about longer-term threats including the sparse stocks of oil reserves in the United States and the threat that Saddam will actually set his oil fields ablaze.

Finance Correspondent Stephen Long reports.

STEPHEN LONG: It was a cent shy of US$40 a barrel late last month, but West Texas Crude has tanked on the eve of war. The price per barrel has fallen by 20 per cent in the past week alone.

And if the pattern of the last Gulf War is repeated, it will fall sharply again when the bombs start tumbling. David Thurtell, commodity strategist at the Commonwealth Bank, says that prospect has speculators scrambling to protect their positions.

DAVID THURTELL: In the last Gulf War the release of reserves on the day the hostilities started pushed oil down by $9 and $10 a barrel. So if you're a speculator and you're long, in an oil position, you do not want to be long if the oil price is going to fall, you know, $9, $10.

STEPHEN LONG: OPEC oil ministers met less than a fortnight ago and reassured the world they would meet any shortfall in supply relating to the Iraqi war. And David Thurtell says that's been a soothing balm for oil prices.

DAVID THURTELL: The main thing is that there's been indications that OPEC will increase production more or less the day that hostilities break out. And if it doesn't, there will be a release from strategic reserves in Western nations.

STEPHEN LONG: So can motorists expect relief in coming weeks from prices above $1 a litre at the bowser? Well, don't count the money just yet. The worry is US oil reserves at a 27-year low.

And across the OECD, inventories are also at their lowest point in many years. Then there's the instability in Venezuela, one of the world's biggest producers. Production there is only now recovering from a prolonged national strike.

David Hale is the former global chief economist at Zurich Financial Services, and he now advises major corporations across the globe. And he's warning of risks beyond the day-to-day trading.

DAVID HALE: There's no doubt that an American victory will probably set the state for lower oil prices. But again, we also have other problems in the oil market. We have Venezuela. And the Venezuela's led to a big loss now, put over the last few months, certainly here in the Western hemisphere.

So while the price of oil will clearly fall, we don't still quite know where the bottom is, and again we don't know how much damage Saddam Hussein will do to the oil fields.

STEPHEN LONG: David Hale says that the world shouldn't forget what followed the last Gulf War.

DAVID HALE: Well, what it did was it led to a major oil price shock which was a blow to the economies of East Asia. It was a modest blow to the economy of Europe and it did slow the whole world economy down. Then things got better. But in the case of the US economy, we had the most sluggish economic recovery recorded in modern times.

STEPHEN LONG: That oil price related slump in the economy helped lose George Bush Senior the presidency, and his son will be hoping he doesn't suffer the same fate as his father. But whatever the long-term risks, traders anticipate further falls in crude oil prices in coming days. David Thurtell believes they could dip by another US$5 a barrel before they turn around.

DAVID THURTELL: Once it gets to sort of the mid-twenties, on a risk reward consideration, oil's starting to represent good value again. Because if the war goes pear shaped or let's just say there's another snap of cold weather or Venezuela hits problems, if you're an oil consumer, it would've been best to get some sort of reasonably priced oil on board in those twenties. So if the oil price spikes up again, you've at least taken some oil on board.

JOHN HIGHFIELD: David Thurtell is a commodity strategist at the Commonwealth Bank and he was speaking with our Finance Correspondent Stephen Long.