washingtontimes.com March 20, 2003

 As war with Iraq has become more imminent, the price of oil, which hit its recent peak of $39.99 per barrel in intra-day trading late last month, has begun to decline precipitously. Falling Wednesday for the seventh time in the last eight sessions, the New York Mercantile Exchange (Nymex) price for its benchmark sweet, light crude oil for next-month delivery closed at $29.88.
 In recent years, oil prices have become increasingly volatile. Average world oil prices bottomed out in the summer of 1998 at about $10 per barrel. Since February 2002, by which time the price of oil had recovered to nearly $20, the cost of the world's arguably most indispensable commodity had soared by another 100 percent to nearly $40 before beginning its recent decline. Rising oil prices over the past year sent the average U.S. nominal gasoline price to a record $1.73 per gallon recently, reflecting an increase of more than 50 cents per gallon from a year ago. 
 These price run-ups have had their impact. Over the past year, higher energy costs have amounted to about 0.5 percent of gross domestic product (GDP), or more than $50 billion. The increase in gasoline prices, which acts like a tax increase, has diverted billions of consumer dollars away from other spending. Meanwhile, many industrial businesses, unable to pass on their higher energy costs because of weak pricing power, have seen their profits fall. That, in turn, has reduced their ability to make new investments and delayed the arrival of a robust economic recovery. 
 Indisputably, these oil-related cost increases have been steep, and the price levels reached in recent days have been high. Still, some serious perspective is in order. After Iraq had invaded Iran in September 1980, following Iran's oil-market-destabilizing 1979 revolution, some OPEC nations commanded a price of $41 per barrel in late 1980. That price would exceed $85 in today's dollars (after adjusting for inflation). And the $41.15 peak oil price in October 1990, following Iraq's August invasion of Kuwait, would be $56 per barrel measured in today's dollars. Adjusted for inflation, the price of gasoline peaked in 1981, when it would have cost about $2.50 per gallon measure in current dollars. That's nearly 50 percent higher than today's price of $1.73 per gallon. 
 What is certain about future crude prices is their unpredictability and volatility. Equally certain is this fact: Whichever direction the price of oil moves will have a profound impact on the sluggish U.S. and global economies. The International Monetary Fund estimates that each $10 per barrel price increase sustained for a year chops 0.6 percent off global GDP a year later. That rule of thumb essentially works in reverse as well.
 History provides one possible outcome. On Jan. 17, 1991, the first day of trading following the U.S.-led coalition attack on Iraq, the price of oil plunged a record $10.56 per barrel on Nymex, falling below $21.50 <ampersand/>#8212; a price less than the pre-invasion oil price. Shortly, the price fell to $18.
 For numerous reasons, however, such a positive scenario may not be repeated. In the first place, today's market has much less spare-oil capacity. In 1990, unused OPEC capacity exceeded 5 million barrels, more than enough to replace the 4.5 million barrels lost when sanctions closed down Iraqi and Kuwaiti exports. Other suppliers also had unused capacity then. Today, non-OPEC sources are producing at their maximum levels. In OPEC, only Saudi Arabia has any meaningful excess capacity, although how much is open to considerable debate. The Saudis are as secretive about their production levels as they are about their Swiss bank accounts, but it is believed they can increase immediate production by only 500,000 barrels. Perhaps another million barrels per day can come on stream in a few months. That's still below the 2 million barrels per day that Iraq has recently been exporting. When war starts, Kuwait may have to shut down output from its wells near Iraq, removing as much as 800,000 barrels from the market. 
 In addition to strained capacity, oil inventories at refineries are at their lowest levels since 1975. And Japan has shut down 14 of its 17 nuclear plants for safety reasons and has begun using oil to generate electricity in their place. Meanwhile, violence has broken out in Nigeria as its presidential election approaches. And Venezuela remains a wild card. The U.S. Strategic Petroleum Reserve has nearly 600 million barrels (less than 60 days worth of U.S. imports), which can be tapped at the rate of 4.3 million barrels per day. 
 In short, there remains little margin for error this time around. In a worst-case scenario, a terrorist attack could conceivably take out the 5 million barrels Saudi Arabia can export each day from its Ras Taura port. Then, all bets would be off.

www.sfgate.com Wednesday, March 19, 2003
(03-19) 21:41 PST (AP) -- JORGE RUEDA Associated Press Writer

CARACAS, Venezuela (AP) -- Venezuela insists it will be a reliable wartime supplier of oil to the United States despite sometimes testy relations and a slow recovery from a two-month oil industry strike.

"We are and will continue to be the most secure supplier of oil to the United States," Vice President Jose Vicente Rangel said this week.

His pledge came despite Washington's recent criticism of President Hugo Chavez for arresting strike leaders and obstructing efforts to hold early elections. Chavez told Washington to keep out of Venezuelan affairs.

Others question how soon Chavez's government can stabilize exports after firing nearly half of the state owned oil monopoly's 40,000 people.

Some customers complain they've had trouble contracting tanker shipments with new personnel. The government isn't releasing export figures. Pre-strike exports averaged 2.5 million barrels a day -- including 1.5 million barrels a day to the United States.

"For the first time in our history, shipping crude to the United States in time of war isn't guaranteed because of Venezuela's internal crisis," argued Alberto Quiros Corradi, a former president of Shell de Venezuela.

U.S. Energy Secretary Spencer Abraham has said it could take at least two months before Venezuelan exports stabilize. While its crude quality is lower than many Middle Eastern grades, Venezuela can ship quickly to the United States compared to 40-day tanker shipments from the Middle East.

Market analysts disagree whether war in Iraq will increase or depress prices, disrupt Middle East production or affect low U.S. inventories. Venezuela traditionally has banked on price rises to boost its oil-dependent economy.

Venezuela's opposition, including nearly all oil workers, went on strike Dec. 4 to protest Chavez's handling of the economy and alleged rights abuses and to demand early elections.

Chavez, a former army officer who led a failed coup bid in 1992, was elected president in 1998 and re-elected in 2000 to a six-year term.

The strike failed. Chavez's government claims it has already surpassed its OPEC production quota of 2.8 million barrels a day and can push it to 4 million barrels by April if a protracted war increases prices.

Fired oil executives say production is closer to 2.4 million barrels. Some analysts, meanwhile, said at an OPEC meeting last week they doubted Venezuela's production recovered so quickly after a low of 150,000 barrels during the strike.

Roger Diwan, managing director of markets at Washington-based PFC Energy, estimates Venezuela is exporting 1.8 million barrels a day and producing 2.4 million barrels a day.

"They've done a good job. They've surprised a lot of people," Diwan said. "I never thought they would get up to this level."

Venezuela's ties with Washington have centered on oil since 1914, when the first rig tapped what proved to be the largest reserves outside the Middle East.

Developed in large part with American capital, the oil industry met U.S. needs in both World Wars, the 1973 Arab oil embargo and the 1991 Persian Gulf War. It sided with U.S. interests despite being a founding member of the Organization of Petroleum Exporting Countries and nationalizing the oil industry in 1976.

Chavez, for his part, has been uncharacteristically quiet about the Iraqi crisis. He has concentrated on consolidating control after the nationwide strike, which cost Venezuela at least $6 billion.

In 2000, Chavez irritated the United States by becoming the first head of state to visit Iraq after the 1991 Persian Gulf War. He offered Saddam Hussein his support for ending U.N. sanctions against Iraq.

Oil is key to Chavez's presidency, generating 80 percent of Venezuela's export earnings and a third of its $100 billion gross domestic product. Venezuela's economy is seen contracting by at least 15 percent in 2003, and a wartime spike in oil prices could provide relief.

A price crash will hurt: Venezuela loses $1 billion per year for each $1 drop in the barrel price of oil.

www.canada.com JAMES STEVENSON
Canadian Press Wednesday, March 19, 2003

CALGARY (CP) - With war being waged half way around the world, perhaps the first impact of the Iraq conflict for most North Americans will be when they pull into their neighbourhood gas stations.

Thursday's attack on Iraq by U.S. and British military forces could put potentially severe upward pressures on the global price of oil. And that directly affects the cost of gasoline, home heating fuel and other sources of energy. Many factors including the length and severity of the war - and whether Iraqi oilfields are destroyed - will dictate how high the price of oil will eventually rise.

In recent weeks traders pushhed crude prices to nearly $40 US a barrel, mirroring levels seen during the Gulf crisis of the early 1990s. But in recent days prices dropped to the low $30s and below amid speculation the war against Iraq will end quickly, with limited disruption to Persian Gulf oil shipments.

At the beginning of the last Gulf war, oil soared to more than $40 US a barrel. Given inflation, that would equate to about $50 US today.

Using the rough calculation that each $1 US rise in the price of crude increased Canadian gasoline prices at the pump by about one cent, $50 oil could send pump prices jumping by 10-13 cents in the short term.

But Vince Lauerman, a global energy strategist with the Canadian Energy Research Institute in Calgary, cautions that the price of oil might react differently during this war.

"It was a pretty soft market going into that last war, but now the market is extremely tight in terms of stocks," said Lauerman.

Tight global oil supplies will indeed be a major factor.

A recent report from the U.S. Energy Department report suggested American inventories were 16 per cent lower than a year ago and nearing a 28-year low.

And even though Iraq produces only about three per cent of world supply, it is now an open question as to whether the Organization of Petroleum Exporting Countries has enough spare capacity to make up for Iraqi production, let alone other potential disruptions from neighbouring states like Kuwait.

Though non-OPEC countries like Russia and Canada have been increasing their oil production yearly, Lauerman says they generally have no spare capacity and no way to turn on the taps harder at times of need.

Suncor Energy, one of the main producers in Canada's oilsands in northern Alberta, agrees.

"We are at production capacity at over 200,000 barrels per day," says spokeswoman Darlene Crowell recently. "We're not like a conventional oil producer who can ramp up more wells in a heightened environment."

Angus McPhail, an analyst at ING Financial Markets in Edinburgh, Scotland, says he believes markets would be awash in crude after a swift war, particularly if Venezuela continues to recover from an oil industry strike and other members of the Organization of Petroleum Exporting Countries keep breaking their output quotas. For the second half of the year, ING Financial Markets foresees an average Brent crude price of $18.50 US a barrel.

"We are adamant that oil prices will fall," McPhail said.

Chris Heggtveit, a federal Finance Department official, says there are too many variables that could come into play to determine the economic cost of the war and high oil prices.

Not only are complex Middle East geopolitical issues at play, but also other events such as Venezuela's ability to ramp up oil production again after months of internal strife that saw the world's third-largest producer at a standstill.

Still, Heggtveit says Canada should be in a better position than most countries to weather any economic storm.

"It's important to note that Canada's economy would be buffered against serious economic shocks by a number of factors."

Firstly, Canada's in a better financial position right now than any of the G-7 group of industrialized nations.

Also, because Canada is a net exporter of oil, there will be some offsetting benefits to very high oil prices. The oilpatch will revel in extremely high profits, but federal and provincial governments will also see an bump-up in royalty payments.

As well, Canada is a member of the International Energy Agency, which is a group of 25 countries formed during the energy crisis of the 1970s.

Net oil importing countries in the IEA are required to keep oil stocks of at least 90 days supply and the group has said publicly that it is poised and ready to put additional oil on the market to control price spikes in the event of an Iraq war.

The question really becomes, how long will a spike in oil prices last?

Craig Alexander, a senior economist with the Toronto Dominion Bank, says the price of oil will fall quickly if U.S. military might becomes apparent.

"The financial markets, if they start to see signs that we are getting a very quick military campaign, will immediately start to price in lower prices for crude oil," he said.

And while the political ramifications of war in Iraq will likely last a long time, oil markets will likely rebound a lot quicker.

"Iraq will remain in the headlines and news long after the military conflict is over," said Alexander. "But those developments are unlikely to be weighing on the price of crude."

"Once the risk of Iraq affecting its neighbour countries diminishes, and once we know for certain what happens to the Iraqi oilfields, at that point the market will begin looking beyond the conflict."

As such, the TD Bank is expecting Canada's economic growth to be a roaring four per cent in the second half of this year.

That forecast assumes that the price of oil will be declining substantially and the geopolitical situation becomes a lot more certain than it has been in the past several months.

By Peter Behr Washington Post Staff Writer Thursday, March 20, 2003; Page E01

The national average for a gallon of gasoline is over $1.70. In some areas, such as Malibu, Calif., prices are even higher. U.S. demand for gasoline has risen 2 percent a year in the past decade.

At the start of the first Persian Gulf oil crisis 30 years ago, America's hulking, chrome-laden cars covered about 15 miles on a gallon of gasoline. But few motorists gave that a second thought -- not with gasoline priced at 38 cents a gallon.

At the same time, American factories soaked up 43 percent of the nation's energy supplies and members of Congress debated how to address the power of the "seven sister" international oil companies that dominated worldwide production.

A generation later, as the fourth Gulf confrontation gets underway, the nation's oil needs and uses have changed, mirroring broad transitions in society and commerce.

Cars have slimmed down in a campaign to boost gasoline efficiency that succeeded in the 1980s but stalled in the 1990s. Persian Gulf kingdoms have supplanted the multinational oil companies as dominant producers. Today, oil companies cautiously manage exploration and inventories, a strategy that played a part in a surge in prices that has continued to the eve of U.S. military action in Iraq. From its peak of $40 a barrel last month, crude oil fell below $30 a barrel yesterday, closing under that level for the first time in three months, on expectations of a swift U.S. victory. Today, gasoline prices nationwide average more than $1.70 a gallon, a record for this time of year.

The transformation in oil dates to the 1970s, when prices quadrupled, forcing U.S. industries to change their manufacturing processes to reduce energy costs. Homes and appliances became more efficient, too, and the amount of energy needed to produce a dollar of gross domestic product dropped by 33 percent from 1973 to 1991.

Soaring pump prices and long gasoline lines in the late 1970s triggered a revolution in the auto industry as well, as consumers demanded cars that went farther on a tank of gasoline. Congress required that new vehicles get at least 27.5 miles per gallon, beginning in 1985. New cars' performance, led by imports, jumped from 20 miles per gallon at the end of the 1970s to 28 in the mid-1980s. Once that target had been reached, thought, it was not raised and the mileage performance of new cars stagnated.

An expanding and more affluent population, driving bigger cars, boosted gasoline demand 2 percent a year over the past decade.

But the restructuring of the oil industry has left the United States increasingly dependent on gasoline imports to satisfy motorists' needs, said Douglas MacIntyre, a senior oil analyst at the Energy Information Administration. U.S. refineries that manufacture gasoline are operating at or near capacity, he said, "and we aren't building new ones."

Until the 1970s, seven major oil companies held the coveted prime oil-production concessions in the Persian Gulf: Exxon, Mobil, Chevron, Texaco, Gulf, Royal Dutch Shell and British Petroleum. Now the seven sisters are four: Exxon Mobil, ChevronTexaco, Royal Dutch/Shell Group and BP.

In the view of Daniel Yergin, the author of "The Prize," the largest multinational companies have become bureaucratic corporations, balancing risks to maximize profits and compelled -- despite their size -- to compete for shareholder support and financiers' capital.

One consequence is the oil companies' unwillingness to get stuck with large inventories of high-priced crude oil or gasoline when pump prices start falling, MacIntyre said.

Paul B. Ting, a managing director of Salomon Smith Barney Inc., estimates that as a result of the wave of mergers in the industry in the past half-dozen years, the seven biggest U.S. oil producers and refiners have cut their crude oil inventories by 115 million barrels.

The U.S. economy stumbled after the Sept. 11, 2001, terrorist attacks, and early last year OPEC cut production and the Bush administration began buying oil for the nation's Strategic Petroleum Reserve. Oil prices began to rise, and U.S. producers let inventories drop.

The inventory numbers are a crucial benchmark of supply and demand for a legion of investors, speculators, and industrial and commercial buyers, who trade oil and oil products on commodity exchanges.

As stocks of crude oil and gasoline in the United States began to shrink last year, traders bid up the prices of oil and gasoline.

Growing concerns about a U.S. confrontation with Iraq began to inflate oil prices in September. A hurricane in the Gulf of Mexico hurt oil production in October, further reducing inventories, and a December strike at oil fields in Venezuela, a critical U.S. supplier, pushed oil prices over $40 a barrel this winter.

Changes in gasoline prices on commodity markets begin to show up at the pumps in as little as a week. The volatility of the system means that energy prices could rise, or fall, rapidly once the uncertainty of the Iraq conflict is resolved, said Adam E. Sieminski, a Deutsche Bank oil-industry analyst.

Three main fields are the key to Iraq's oil production, which contributed 5 percent of U.S. oil imports last year, Sieminski said. "If U.S. and British forces can secure them before anyone blows them up, that would be very good news."

That is the current bet among a majority of traders on commodity markets, analysts say -- one reason why oil prices have dropped recently.

Oil prices could sink to $25 barrel or lower if the U.S. campaign succeeds, said analyst Peter Beutel, president of Cameron Hanover Inc., in New Canaan, Conn.

Mark M. Zandi, the chief economist at Economy.com, said, "The markets are priced for a perfect war." If all goes well, the U.S. economy will turn upward. "Not roaring back, but back," he added. "If we get anything less than that, we have a problem. If prices don't fall quickly, I'd say we're in a recession in a month or two."

www.thestar.com Mar. 19, 2003. 08:12 PM

LONDON (AP) - Iraqi troops needed just a few days and some plastic explosive to destroy more than 700 wellheads and turn Kuwait's oil fields into a desert inferno. Fears are growing that President Saddam Hussein might have organized a much more meticulous sabotage of Iraq's own oil fields, in a scorched-earth tactic that could cripple Iraqi production.

The oil industry has buzzed with rumours in recent weeks that Iraqis are rigging their wells with explosives in the hope of slowing a U.S.-led attack and making the country's oil wealth worthless for any new government. 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 two percent of all the crude it consumes.

Oil exports are also a major source of the money that would be needed to pay for Iraq's reconstruction after a war. Due to their strategic importance, the U.S. Defence Department said it would try to secure Iraq's oil fields quickly to prevent forces loyal to the Iraqi president from damaging them.

"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 Defence 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.

Conventional explosives attached to wellheads and other vital facilities could halt production at any of Iraq's 1,685 wells. With more than twice as many oil wells as Kuwait, Iraq could suffer an even greater economic and environmental disaster.

When Iraqi troops retreated from Kuwait in February 1991, they attached plastic explosives to wellheads - clusters of pipes and valves protruding from underground wells - and piled sandbags against them to direct the force of the explosions for maximum effect.

The result was Dante-esque geysers of burning crude at 603 wells and serious damage at more than 100 others. Teams of firefighters from the United States, Canada and eight other countries worked from April until November of that year to douse the last flames.

Most of the teams used seawater pumped through Kuwait's empty oil pipelines to battle the fires. The heat was so intense, at more 1,093 degrees C, that water sometimes continued bubbling on the ground for two days afterward, said Canadian 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.

It took Kuwait more than two years and $50 billion to restore its oil output to pre-Persian Gulf War levels. Iraq, if it sabotaged its oil fields, could take longer and cost much more.

Iraq's fields and pipelines are badly run-down after 12 years of UN economic sanctions. Its fields are also much farther from the ocean than those in Kuwait, so firefighters might be unable to pump seawater to tackle burning wells there.

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.

Manouchehr Takin, an analyst at the Center for Global Energy Studies, said he doubts that Saddam would go so far as to place explosives 100 metres into well shafts.

"I'm not sure there are enough engineers and rig operators in Iraq to do this kind of work," he said.

Even if the Iraqis did booby-trap their oil fields, Takin argued Saudi Arabia, Venezuela and other OPEC member countries could ramp up their production to offset Iraq's two million barrels a day in exports.

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

Brown & Root Services of Houston has drawn up a plan for the U.S. Defence Department for containing and assessing any damage to Iraqi oil installations. The Pentagon has invited companies to express interest in this possible work but has yet to award any contracts.

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

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

Such a nightmare scenario gives pause even to well-fire veterans like Badick.

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.

Perhaps the worst challenge would be sabotage from a radioactive "dirty bomb," Badick said.

"Would you go working around Chernobyl?" he asked, recalling the 1986 nuclear accident in Ukraine.