Geopolitical ills seen bringing volatile retail gas prices in '03

www.globeandmail.com By LILY NGUYEN With files from Reuters and Bloomberg

Saturday, January 11, 2003 – Page B1

CALGARY -- Motorists will endure a year of ups and downs in the price of driving as geopolitical tensions send crude oil -- the key driver of retail gasoline prices -- swinging to extremes, a Toronto-Dominion Bank economist said yesterday.

In a topic paper, TD senior economist Craig Alexander predicted retail gasoline prices in the country could hit 84 cents a litre on average and go even higher if the United States and its supporters decide to go to war against Iraq.

Conversely, the easing of political tensions could push pump prices down to 66 cents or lower.

"Geopolitical events are likely to produce considerable volatility in crude oil prices in 2003, which will translate into large swings in prices at the gas pumps," Mr. Alexander wrote.

The average pump price across Canada today is about 76 cents, he said.

The possibility of impending war with Iraq, an interruption of oil exports from Venezuela because of a general strike and low U.S. crude inventories have already combined to send crude prices well into the range of $30-plus (U.S.) a barrel.

Yesterday, light sweet oil for February delivery slipped 31 cents on the New York Mercantile Exchange to close at $31.68 a barrel on expectations the Organization of Petroleum Exporting Countries would boost production to make up for the shortfall from Venezuela.

Analysts predicted the oil cartel would raise its output quota by between one million and 1.5 million barrels a day at its emergency meeting tomorrow.

"OPEC's going to lift production, it's just a question of how much," said Juha Laiho, a crude oil trader in Houston for Finnish oil company Fortum Oyj.

But Mr. Alexander said an output change may not have a big effect.

"It is important to note that commodity markets have already priced in an increase in production, so unless the increase is significantly larger than one million barrels, the impact on prices will be limited."

Mr. Alexander said that while OPEC is moving to limit some of the effects of the Venezuelan strike, it has only limited capacity to absorb a war-related supply crunch.

If Venezuelan exports are not back on track in the event a war breaks out, a price jump would be more pronounced, he said.

Mr. Alexander added that such a concern could affect the timing of a move by the United States against Iraq.

"A conflict would likely drive prices temporarily up to $40 to $50 a barrel or higher if Venezuelan oil exports are still disrupted," he said.

A price increase of $1 a barrel translates into a rise of approximately 1 cent (Canadian) a litre at the pumps, he said.

Yesterday, a U.S. official said the United States supports creating a "group of friends" of Venezuela made up of the South American nation's neighbouring countries to end the crisis and get exports flowing again.