Oil picture not as bleak as painted

www.globeandmail.com By BRIAN MILNER

Monday, January 27, 2003 – Page B2

There's nothing like a deepening threat of war in the Middle East and an eight-week strike by oil workers in Venezuela to frighten the bejeebers out of investors and send the price of crude skyrocketing on world markets. And it doesn't help when pundits paint pictures as bleak as any conjured up by Francisco de Goya.

Warning bells have been going off everywhere in recent days, roiling the markets. Oil and gold both shot up again on Friday after U.S. officials helpfully went public with their concerns that Saddam Hussein is prepared to blow up his own oil fields at the first signs of a U.S. attack on Iraq.

Last week, former Saudi oil minister Sheik Ahmed Zaki Yamani warned that if Mr. Hussein retaliates against an American invasion by blowing up Iraq's wells, crude could soar to as much as $100 (U.S.) a barrel.

"Saddam could resort to the destruction of his oil fields and this means the global strategic stockpiles will sharply decline and the entire world will be pushed toward a horrible abyss," Mr. OPEC himself declared. "I think the U.S. could cause an international catastrophe if it attacks Iraq."

Last fall, he wondered about an Iraqi chemical assault on the oil fields in neighbouring Saudi Arabia and Kuwait driving prices to that magical $100 figure.

But setting aside the alarmist rhetoric, a case can be made that $25 oil is just as plausible -- and a lot more probable -- even if the bombs start falling in Iraq and most of Venezuela's crude stays in the ground. And if the Venezuelan and Iraqi crises are resolved quickly and peacefully, oil will be more plentiful and considerably cheaper.

On the Iraqi front, the markets have been paralyzed by fear that Washington is moving inexorably toward war, with the countdown possibly starting this week.

The United Nation's chief arms inspector, Hans Blix, is scheduled to report today on his team's progress or lack of it; and U.S. President George W. Bush will make what could be an extremely bellicose State of the Union address to Americans tomorrow. But Mr. Blix has already indicated there is no definitive proof yet that Mr. Hussein is hiding those celebrated "weapons of mass destruction." And Washington's allies, including Canada, have been urging Mr. Bush to wait until the inspectors have had a chance to complete their work or else show clear evidence that the Iraqi dictator has such weapons at his disposal.

In Venezuela, there are signs the national strike that has crippled production is running out of steam. The latest shipping data show that Venezuelan oil exports jumped last week to nearly 700,000 barrels a day, about one-quarter of the prestrike output, but considerably higher than the average during the past month.

That doesn't mean the country is any closer to resuming full production, which would take months, even if all the striking workers returned tomorrow. Or that a political solution to the crisis is imminent.

So let's assume the worst -- or nearly the worst -- in both cases.

Mr. Bush unleashes his military firepower on Iraq, remembering to dispatch enough troops to safeguard the oil supply. Meanwhile, the impasse in Venezuela between embattled President Hugo Chavez and opposition business, labour and political groups continues.

That could leave refiners scrambling to replace an estimated 500,000 barrels a day, according to a scenario outlined by the Middle East Economic Digest. But that does not mean we'll be looking at massive shortages, gasoline rationing or freezing homes and offices.

At worst, the business weekly suggests, the West would have to tap strategic reserves, which should be more than enough to cover a prolonged shortfall. Counting the huge U.S. oil stocks, which have yet to be touched, the developed world has enough oil to replace all Venezuelan and Iraqi shipments for at least half a year. Even longer, if the Saudis can crank up more production, as they have long promised.

Current Saudi Oil Minister Ali al-Naimi said at Davos on the weekend: "There is no shortage in the market and there should be no reason for prices where they are today."

There are reports that the Saudis and other Middle East producers are already stockpiling reserves outside the region, in case shipments are disrupted.

If the Venezuelans can get back to pumping at full volume, the global economy remains sluggish, and there is a normal decline in demand of the sort that occurs just about every spring, the phrase we are most likely to be hearing from analysts is "oil glut," rather than more hand-wringing about tight supplies.