Industry Sees Opportunity to Push U.S. for New Rules

<a href=www.nytimes.com>The war in Iraq is not all bad By CLAUDIA H. DEUTSCH

No one in the chemical industry will come out and say it. But the truth is, for chemical companies, the war in Iraq is not all bad.

Executives know that in times of war, people harbor nagging fears that burning Iraqi oil fields and rampant unrest in neighboring countries could quench the flow of oil and send prices up sharply, inevitably pushing gas prices up as well. And that, they think, makes the timing right to push Washington for energy policies that will at least curb the volatility of gas and oil prices.

"The fact that we are having a war reminds us again of the fact that we have to come to grips with a U.S. energy policy," said Greg Lebedev, president of the American Chemistry Council, the industry's main trade association.

To be sure, the industry has a lot to worry about. Its major input, oil, is expensive, and its outputs go to many cyclical industries that will weaken as a war wears on.

Even so, few industry experts think that war will drive oil or gas prices significantly higher. The severe winter, coupled with the long run-up to war, did that months ago. "The rise in natural gas prices was extraordinary over the last three months," said Klaus Peter Löbbe, chairman of BASF. "Some of that was the severe winter, but without the threat of war, prices would never have been this volatile."

Now, the weather is warming up, and there is no longer uncertainty about war. For two weeks, oil and natural gas prices crept down, until yesterday, when oil prices surged 6.50 percent and natural gas 2.44 percent.

"A week ago, I'd have said that as soon as planes start flying, energy prices would go through the roof," said William S. Stavropoulos, chairman of the Dow Chemical Company. "But Saudi Arabia is producing full out, Venezuela is coming back slowly, and it doesn't look like there will be huge damage to Iraqi oil fields."

The chemical industry has a lot at stake in whether the oil keeps flowing. It uses oil and gas as raw materials as well as fuel.

Thus, the council did not wait for war to break out to use it as a platform for seeking help. On March 11, the council led a campaign to press the government to work with Canada and Mexico to increase the supply of natural gas in North America, to cut consumption by governmental agencies and to encourage conservation among consumers and companies. It also asked that the president not support either environmental regulations that discourage drilling in new areas or those that offer incentives to switch from coal to natural gas, thus causing a run on already tight supplies of natural gas.

Natural gas now sells for $5 to $6 per million British thermal units, a sharp drop from the $19 price of late February, but more than twice the $2.50 per million B.T.U.'s the industry had grown accustomed to. Similarly, oil prices have dropped more than $10, to less than $30, but that is still well above the $20 the industry considers acceptable.

"After the last few months, $5 for natural gas may not look so bad, but it still is not cheap," said Frank J. Mitsch, a chemical industry analyst at Bear, Stearns, who said that when all the chemical companies have reported first-quarter results, "we will see a lot of red ink."

The immediate effect is not the same across the industry. The DuPont Company, which derives a large part of its revenue from pharmaceuticals or other products that are not based on hydrocarbons, has kept earnings up. Dow, which makes basic chemicals that are dependent on hydrocarbons, is in the red.

DuPont spent about $2 billion on hydrocarbon fuels and raw materials last year. Dow, a similarly sized company, spent $8 billion. Dow's hydrocarbon costs rose $400 million in the last quarter alone.

"No question," Mr. Stavropoulos said, "the impact of high energy prices has been dramatic for Dow."

But DuPont and companies like it are not home free. They may not buy a lot of hydrocarbons, but their suppliers do. DuPont uses butadiene methanol and cyclohexane ammonia, oil derivatives, to make nylon, while it uses ethane, made from natural gas, in its ethylene polymers.

"There's a four-to-six month lag between the rise of energy prices and its impact on our income statements," said Raymond G. Anderson, DuPont's director for investor relations.

Thus, if the war drags on, or if it spurs terrorist attacks, all bets are off.

"If the war drags on, energy prices really could rise again even as global economies drop," said Mr. Mitsch of Bear, Stearns. "And that could be a real double whammy for the chemical industry."

A Roar, an Explosion, and First Thoughts Are of Terrorism  (April 26, 2002)