US may face higher gas prices whatever the outcome in Iraq

Ref By Andrew Caffrey, Globe Staff, 3/27/2003

Regardless of what happens in Iraq, American drivers could see another bout of high pump prices    

Melrose MA - Lauren Rotondo stands next to her SUV's in her driveway in Melrose. Lauren and her husband own two SUV's and are still willing to pay the extra money to drive them, even though gas prices are increasing.

Political violence in Nigeria has cut production of high-grade crude oil used for gasoline in the United States by 40 percent, forcing refineries on the East Coast in particular to scramble for replacement stocks and bidding up prices in the process. Meantime, Venezuela's state-owned petroleum industry, which still hasn't fully recovered from the civil strife begun in December, is in such poor condition that some analysts warn it may see a drop in output.

These developments come when stocks in the United States are so low that the US Energy Information Administration yesterday said "it will likely take many more weeks, or months, before US petroleum inventories return to normal levels."

Despite a recent surge of imports, the agency said gasoline stocks are declining when suppliers should be reloading ahead of the peak summer driving season. Future prices for gasoline for April delivery rose 4 cents a gallon, or 4.44 percent, to 92.4 cents yesterday after the government released its report. And analysts say the system is so tightly stretched that even small, unanticipated developments could push prices up further.

"It doesn't look like we're going to have a lot of relief on the gasoline prices," said Michael Lynch, president of Strategic Energy & Economics Research Inc., a Winchester consulting firm. "Right now, we're getting stung by yellow-jackets -- a lot of smaller things that are creating problems. When the market gets really tight, little operational problems that you wouldn't ordinarily notice make a really big difference."

Another looming worry: disquiet among oil workers that could lead to a strike in Colombia, which sends its crude to American states located on the Gulf of Mexico for refining. If Colombia "went down, clearly we would be looking at a very tight situation for the US Gulf for gasoline production," said David Fyfe, an oil analyst for the International Energy Agency in Paris.

The near-term global outlook for oil supply and prices continues to see-saw. Prices had plummeted to $26 a barrel, from $38, when it looked like the US-led military coalition was heading to swift victory in Iraq. That in turn had begun to pull down retail gasoline prices. But now oil prices have been creeping back up as those forces encounter stiffer resistance from Iraqi fighters, in addition to concerns about the situation in Nigeria. Yesterday, oil futures on the New York Mercantile Exchange rose 66 cents, to $28.63 a barrel.

One big factor in the earlier drop is increased output from Saudi Arabia and other producers to keep spiraling prices from harming the US economy, and to compensate for lost Venezuelan and Iraqi suppliers. Indeed, some analysts are predicting that the Saudis and other producers may soon cut back output to prevent a glut that could collapse prices.

But the rosy macro outlook doesn't necessarily filter down equally to local energy markets.

Saudi Arabia's oil, for example, is high in sulphur, and so most of it is sent to refineries in the US Gulf region that are equipped to process it into gasoline. East Coast refineries, meantime, got about 26 percent of crude oil supplies from Nigeria and Venezuela last year, while Venezuela provided about 10 percent of the region's stocks of finished gasoline, leaving the region vulnerable to problems in those countries.

Venezuelan oil production has bounced backed markedly since the strikes petered out, with analysts saying oil production is now around 2.4 million barrels a day. But they add that it will be weeks before the state-owned petroleum company will be exporting gasoline from its refineries in significant amounts.

Moreover, the Venezuelan system is in poor shape after the strike, and even in the best of times production from existing wells declines so quickly that analysts say the system requires billions in ongoing investment.

But the Chavez government fired thousands of workers, including engineers it needs "to arrest oil field decline rates," said Fyfe of the International Energy Agency, and Venezuela faces such a cash crunch after the strike that yesterday President Hugo Chavez said the country needs to restructure its foreign debt.

"You are going to see a fall in production. The problem is, you don't know how much that's going to be," said David Voght, managing director of IPD Latin America, an energy consultancy in Caracas. Voght cautioned that the Venezuelan oil executives are "in an uphill battle and are going to encounter a lot of difficulties." A spokesman for Petroleos de Venezuela SA, the state oil company, didn't return messages seeking comment.

Meanwhile, the situation in Nigeria remains highly volatile since the violence that erupted in the Niger Delta March 12 prompted three major oil companies to shut or curtail facilities and evacuate workers, cutting the nation's oil output by 800,000 barrels a day. Yesterday ethnic Ijaw militants called for a cease-fire if the government and a rival tribe would agree to renegotiate political boundaries for national elections April 19. A spokesman for the rival warring tribe of Itsekiris seemed to reject the Ijaw call, according to wire service accounts.

Producers elsewhere in Nigeria are believed to be increasing output, which may partially offset current declines. But analysts said the intensity of the current fighting has them worried that the instability in the Niger Delta could last for months.

The war with Iraq is the wild card in all of this global turmoil. If the war does indeed go quickly, then crude prices could fall further, pulling down gasoline prices. Already the decline in crude prices from the March highs has been "so profound" that gas prices should be in the $1.50 to $1.60 a gallon range by summer, down from the $1.69 a gallon national average, Energy Security Analysis Inc., a Wakefield energy consultancy, said yesterday.

Another potential source of relief could come from additional exports from Europe, and from Asian producers drawn by higher prices in the United States. However, Fyfe of the International Energy Agency warns that US gas prices might not fall as much as oil prices if problems in Nigeria and Venezuela persist.

And if the war takes longer than expected, and the United States is not able to return idle Iraqi oilfields to production anytime soon, crude prices could continue marching back up.

"If crude stays high, and your gasoline develops this tightness, you can get gasoline bounce to over $2 a gallon quite quickly, and it might get worse from there," said Jan Stuart, who heads up research on global energy futures for investment bank ABN Amro Inc., in New York.

Andrew Caffrey can be reached at caffrey@globe.com.