www.aberdeennews.com Posted on Tue, Feb. 25, 2003 H. JOSEF HEBERT Associated Press

WASHINGTON - The government's emergency oil stocks will not be used to dampen soaring energy prices, Energy Secretary Spencer Abraham told senators Tuesday, but the Bush administration will move quickly to draw on the reserves if severe supply shortages appear.

The emergency stocks "should not be used to address price fluctuations," Abraham told senators, worried about soaring fuel costs.

"We will and we can act quickly to use the Strategic Petroleum Reserve ... to offset any severe disruptions if it's needed," Abraham told a Senate hearing. He said, however, the 600 million barrels held in the reserve on the Louisiana-Texas coast would be used only "to provide energy security."

"We do not believe it should be used to address price fluctuations," Abraham said.

Appeals for government intervention grew louder Tuesday as spot prices of natural gas briefly soared to nearly double the record high of two years ago, in the midst of the California energy crisis, and the price of gasoline lingered at over $2 a gallon in many parts of the country. Heating oil supplies remained tight and prices high.

"People are being pinched like never before" by soaring gasoline and other energy prices, Sen. Ron Wyden, D-Ore., told Abraham. Wyden said consumers "are getting hosed because they're not getting any protection."

Likewise, Abraham dismissed a request by a group of New England heating oil companies that the government make available some of the 2 million barrels of heating oil kept in a Northeast reserve. "Two million barrels is not a lot," he said, and it should be kept in place "unless there's an emergency situation in terms of supply."

Abraham said it may be two to three months before Venezuelan oil shipments to the United States return to normal levels, although he suggested the political crisis bedeviling oil production in the South American country has passed. Venezuela has been a leading source of U.S. imports, accounting last year for about 1.5 million barrels a day. Most analysts place part of the blame for the low supplies of crude and petroleum products on the loss of Venezuelan oil imports.

Abraham, appearing before the Senate Energy and Natural Resources Committee, said he understood that "the crisis that has essentially shut down production (in Venezuela) has passed," but it would take 60 to 90 days before the country's imports would return to normal levels.

At a separate hearing later Tuesday, senators expressed dismay about the sudden spike in the price of natural gas, which is used widely across much of the country for heating and for producing electric power.

Natural gas prices have increased by nearly 40 percent since the first of the year and jumped dramatically this week. Contracts for gas delivery in March closed Tuesday at $9.58 per 1,000 cubic feet, an increase of almost $3 from last week.

Spot prices took an even sharper jump.

Guy Caruso, head of the Energy Information Administration, told senators the spot price of natural gas at the Henry Hub, a benchmark delivery point in Louisiana, soared briefly $18 and $20 Tuesday before dropping back to $12.20, the same as on Monday. The spot price two years ago, in the midst of California's energy crisis, reached a high of about $10 per thousand cubic feet.

Only a small fraction of the natural gas sold, between 5 percent and 10 percent, is bought on the spot market. Most gas is contracted in advance at lower rates. Still, the run-up caught energy analysts and industry executives by surprise.

"A lot of this is people speculating," Keith Rattie, president of Questar Corp., a natural gas producer based in Salt Lake City, told the senators. He added that much of the speculation is being triggered by higher than expected demand and low natural gas inventories in storage.

The EIA, the statistical arm of the Energy Department, reported last week only 1,168 billion cubic feet of natural gas were in storage as of mid-February, 27 percent lower than the five-year average at this time and 43 percent below what was in storage a year ago.

On the Net: Energy Information Administration: www.eia.doe.gov

money.cnn.com February 24, 2003: 4:36 PM EST By Mark Gongloff, CNN/Money Staff Writer

NEW YORK (CNN/Money) - As U.S. gasoline prices climb to near record highs, some say relief is sitting in vast salt caverns near the Gulf of Mexico -- about 600 million barrels of oil, that is. Black gold. Texas tea.

But while tapping this reservoir could cut oil and gas prices, President Bush probably won't turn the spigot, at least not until war breaks out in Iraq. And that's probably a good thing, according to some economists and energy experts.

Driven by worries about a possible U.S.-led war in Iraq and an oil workers' strike in Venezuela, the world's No. 5 oil exporter, crude oil prices have nearly doubled in the past year, surging to two-year highs. Iraq sits on the world's second-biggest untapped oil reserve and is in the middle of the world's biggest oil-producing region, the Persian Gulf.

Meanwhile, gasoline prices have jumped about 20 percent in the past six months and about 50 percent in the past year.

Motorists in some cities around the country are paying $2 for a gallon of gas, and a recent survey by the American Automobile Association (AAA) found U.S. gas prices averaging about $1.66 a gallon, not far from the survey's record high of nearly $1.72, reached in June 2001.

All of this is bad news for a U.S. economy still struggling to recover fully from the recession it suffered in 2001.

Higher oil and gas prices act as a sort of tax on consumers and businesses, according to many economists. If consumers are spending more at the gas pump, they've got less to spend on other things, and businesses have a harder time making a profit when they have to pay more for energy.

As a result, some politicians have begun calling for President Bush to release oil from the Strategic Petroleum Reserve (SPR), those vast pools of oil sunk deep beneath Texas and Louisiana, to boost the supply of oil and drive prices down. Related stories Gas gouging alleged U.S. hits oil slick The Iraq effect

"Having but not using the SPR is like having an ace in the hole and saying you're not going to play the card," Sen. Charles Schumer, D-N.Y., said last week.

But most oil analysts say it's impossible to tell how much good releasing oil from the SPR would actually do to cut prices, with so many factors -- including the possibility of an oil-worker strike in Nigeria, a key exporter, and an exceptionally cold winter in the Northeast -- pulling oil prices in different directions.

"There are so many factors going on right now; it's a perfect storm," said Genevieve Murphy, a spokeswoman for the American Petroleum Institute, an industry lobbying group.

What's more, if the United States makes a habit of toying with its SPR simply to manipulate prices, it could find itself in the position of competing with the Organization of the Petroleum Exporting Countries (OPEC), the cartel that exports about 38 percent of the world's oil and has a big influence on oil prices.

"We could say we were releasing oil to drive prices down until they get to $25 a barrel," said Fadel Gheit, oil analyst with Fahnestock & Co. "Then OPEC could say it'll cut production to keep prices up. It's a very delicate subject to tinker with."

The SPR was established after the Arab oil embargo of 1973-74, which caused oil and gasoline prices to nearly quadruple, leading to a long and nasty U.S. recession.

The SPR's 600 million barrels of oil could allow the United States to survive for up to 60 days without any oil imports and for up to 300 days without imports from the Persian Gulf.

Its oil is meant for use only in the event of oil supply shortages "of significant scope or duration" that hurt the economy. Though it's been used in other ways -- including a sale made to help balance the federal budget in 1996 -- President Bush has long held that he won't touch the SPR except in extreme cases.

"The SPR is, by design, to be used for severe disruptions of the market. That is a type that has not occurred," White House spokesman Ari Fleischer said last December, a stand the administration has maintained ever since. War might lead to tapping the SPR

Some analysts think the eruption of hostilities in Iraq -- which could happen in the next few weeks -- will be the right moment to tap the SPR.

Bush's father did the same thing at the start of the Gulf War in 1991, authorizing the sale of 14 million barrels from the SPR at the same time he announced that the military effort to drive Iraqi forces from Kuwait had begun. The average price of a barrel of crude oil plummeted from $32.25 on Jan. 16, 1991, the day of the announcement, to $21.48 the following day.

The idea that the United States was willing to keep oil flowing through the market provided a big psychological boost, analysts said -- a boost that might soon be necessary again.

"The market is so fragile that there needs to be an announcement [of SPR tapping] simultaneously with the announcement of war," said Larry Goldstein, President of PIRA Energy Group, who along with PIRA Chairman John Lichtblau, authored the SPR concept in 1971. "Barrels and bombs must be released simultaneously."

Though Goldstein and Lichtblau criticized the first President Bush for not tapping the SPR sooner, Goldstein said the current President Bush should wait in this instance because it's possible the SPR release might not be necessary -- there might not be a war at all.

And other analysts note that simply going to war might not be enough to constitute a supply emergency; Bush might not tap the SPR until he sees actual disruption in supply.

After all, oil prices will probably fall a bit once war begins simply because traders will be relieved that the build-up to war is over; and prices would be falling in the spring anyway, when demand for heating oil drops.

"We could suddenly have oversupply and weaker demand, and that will probably bring oil prices down on their own," said Gheit of Fahnestock & Co.  

www.msnbc.com By Martin Wolk MSNBC

Feb. 21 — Anyone who feared rising inflation after this week’s startling report on producer prices can breathe a sigh of relief knowing that consumer prices barely budged last month outside the energy sector. But don’t celebrate just yet: Rising energy prices are pinching consumers this colder-than-normal winter, putting yet another damper on an already sluggish economy.          RETAIL ENERGY PRICES ROSE 4 percent in January alone and are 14 percent above year-ago levels, according to Friday’s Consumer Price Index. A strike in Venezuela, unusually cold weather in much of the country and the looming prospect of military action in Iraq all are playing a role in driving up the price of oil and natural gas, analysts say.        Volatile energy prices routinely are filtered out of monthly price reports to get a measure of “core” consumer inflation, which was a nominal 0.1 percent last month. But persistently higher fuel prices have the effect of a not-so-hidden tax increase, robbing consumers of otherwise discretionary income and denting confidence every time motorists drive by the corner gas station, said Ethan Harris, chief economist for Lehman Bros.        “It’s creating a new source of drag on the economy,” said Harris, estimating the increase in energy prices will trim about 0.5 percent from first-quarter growth, which is expected to be about 2 percent.        “It’s been very broad-based, so it’s a pretty significant hit,” Harris said. “There is also a psychological effect that goes along with it. No other price is so widely visible.”         PAYING UP AT THE PUMP        Gasoline pump prices are up about 23 cents a gallon since December, leading Merrill Lynch economists to estimate the nation’s $10 trillion economy is growing at a rate about 0.3 percent slower than it otherwise would have. (Economists generally figure that every penny-a-gallon increase in the price of gasoline drains a little more than $1 billion in consumer spending power over the course of a year.)        And it could get worse before it gets better, with oil prices likely to rise above their 1990 peak of $41 a barrel from the current $35 even in a “quick war,” according to the Merrill analysis.        None of this is to suggest that rising oil prices will knock the struggling economy back into recession, which is still seen as unlikely. Oil prices would have to rise above $60 a barrel to begin to approach the energy price shocks of the 1970s and 1980s, according to the analysis.        But Bill Dudley, chief economist at Goldman Sachs, warns that inflation, driven by energy prices, could be “sticky” in coming months, posing a long-term challenge to the Federal Reserve and other economic policy-makers.         LONG-TERM RISKS        Given the relatively high unemployment rate, limited wage pressure and slow economic growth, there is little risk of a lasting increase in inflation over the near term, Dudley and other said. Last month’s 0.9 percent increase in core producer prices and 0.1 percent increase in core consumer prices suggest that businesses face a substantial “margin squeeze” and are unable to pass along their price increases, said Gerald Cohen, senior economist for Merrill Lynch.        But over the longer term, “there are some more serious inflation risks,” Dudley said in a report.        For one thing, the Fed apparently has been spooked by the prospect of Japanese-style deflation and may be willing to tolerate a higher sustained inflation rate to ensure steady economic growth, Dudley said. Second, last year’s record trade deficit makes it clear the dollar, which has fallen about 5 percent over the past year, “will need to fall considerably further to restore U.S. trade competitiveness,” leading to higher import prices, he said. Finally productivity growth could slow as the pace of deregulation and trade liberalization slows from the 1990s.

Playing now: • Stocks notch another weekly gain • CPI rises on energy costs • Sotheby’s not for sale       Last month’s 1.6 percent increase in producer prices — the biggest monthly jump in 13 years — stole most of the economic headlines this week but the number was widely seen as an anomaly. Wholesale fuel prices rose about 15 percent last month, and prices for passenger cars and light trucks were up by about 3 percent, according to government figures. But the Labor Department analysis fails to take account of the low-interest loans that keep the effective price of passenger vehicles relatively unchanged, said Harris of Lehman Bros.        Other recent indicators hint at persistent strength in the economy, including a report that housing starts surged in January to their strongest pace since the late 1980s. But as the nation’s focus increasingly turned to the prospect of war in Iraq in late January and early February, the economy appears to have slowed, said Harris. Regional manufacturing indicators in the mid-Atlantic and New York regions turned down in early February, and a President’s Day blizzard brought retail activity to a grinding halt for several big shopping days in much of the nation.        “Generally the data for December and January look OK, but we’re already getting hints that February is going to be a lot weaker,” Harris said. “You can kind of feel the economy slowing down. ... I think we’ll get softer data in February and March, then hopefully some positive resolution around Iraq and we’ll begin picking up again.”        But he cautions that a “bad war” or even no war at all could leave the economy hanging fire, stuck in slow-growth mode for much of the year.        “It’s hard to see how the economy gets back onto its feet with Iraq hanging in the background,” he said.

www.miami.com Posted on Tue, Feb. 18, 2003 BY DULUE MBACHU Associated Press

LAGOS, Nigeria - Nigeria started sending replacement workers to its oil-export terminals Monday, trying to stave off a shutdown of crude exports amid a strike by a powerful oil workers' union.

The strike over pay and working conditions comes as the threat of war against Iraq and a prolonged strike in Venezuela have pushed oil prices near two-year highs. Nigeria is the world's sixth-largest exporter of crude, and half of its exports go to the United States.

In London, benchmark Brent crude fell 52 cents Monday, hitting $31.98, after last week's two-year highs. U.S. markets were closed for Presidents' Day.

The strike was launched by union employees of the Department of Petroleum Resources, a key government unit overseeing operations of oil multinationals, including ExxonMobil, ChevronTexaco, Royal Dutch/Shell and TotalFinaElf. The strike is backed by the country's leading Petroleum and Natural Gas Senior Staff Association of Nigeria.

''The strike is now total,'' association spokesman Femi Familoni said. ``But the effect on exports will be gradual and begin to tell after some days.''

The Department of Petroleum Resources said Monday that managers would fill in for striking workers and vowed that the oil would continue to flow.

''We have sent out management staff to the various terminals, depots and jetties to handle the jobs left by the strikers. There'll be no disruption of services as far as the management is concerned,'' said Belema Osibodu, an agency spokeswoman.

Strikers are demanding more than a year's worth of back pay, including unpaid overtime, and expenses and travel allowances. They are also demanding greater autonomy and better financing for the department, which they say is crippled by inefficient bureaucracy.

President Olusegun Obasanjo's energy advisor, Rilwanu Lukman, offered to meet with the strikers Feb. 25, according to union officials. But strikers rejected the proposal, saying it did not reflect the urgency of their demands.

The government said it offered some concessions to the striking workers, including payment of rent subsidies, ''but it doesn't look like that has been enough to make them call off the strike,'' Osibodu said.

www.washingtonpost.com By Michael Dobbs Washington Post Staff Writer Tuesday, February 18, 2003; Page A03

Enough oil is stored in the deep, cone-shaped salt caverns along the Gulf of Mexico -- most of them large enough to accommodate the towers of the World Trade Center -- to replace a year's worth of imports from Saudi Arabia.

Originally conceived as a response to the oil crises of the 1970s, the Strategic Petroleum Reserve has become as much a part of the United States' strategic arsenal as the aircraft carriers, airborne divisions and spy planes converging on the Persian Gulf region. According to the Department of Energy, the 599-million barrel reserve constitutes the nation's "first line of defense" against disruptions in energy supplies.

As President Bush prepares for war with Iraq, he has come under pressure to use the reserve to calm an increasingly jittery market. In addition to the uncertainty caused by the Iraqi crisis, a general strike in Venezuela has helped push oil prices to new highs, and slashed inventories in many parts of the world to critically low levels.

If the past is a guide, and Bush follows the precedent set by his father in the Persian Gulf War in 1991, he probably will resist the temptation to tap into the underground storage sites in Texas and Louisiana until the onset of any hostilities. If the attack on Iraq begins, he will order the release of some of the oil in the reserve, a move designed to signal the United States' ability to ride out any temporary panic over the oil market.

If the war went badly, and Iraqi President Saddam Hussein succeeded in torching Iraqi oil fields or hitting oil facilities in neighboring Kuwait or Saudi Arabia, the reserves would assume huge strategic importance. The 50 or so caverns in Louisiana and Texas contain enough oil to replace 53 days of lost imports. In practice, officials say, supplies should last considerably longer, as the United States buys much of its oil from such countries as Canada and Mexico, which would unlikely be interrupted by a crisis in the Middle East.

The Strategic Petroleum Reserve is "a powerful instrument," said John Shages, one of the Energy Department officials responsible for managing the network of storage sites, pipelines and loading facilities strung out along the Gulf of Mexico. "It gives the president a tremendous tool to use in the event of a severe disruption to the market, from an act of God to a political-military event."

Because of the tightness of the international oil market, said Edward Porter, an economist at the American Petroleum Institute, the Strategic Petroleum Reserve might end up playing "a much more central role" in a new Gulf war than it did in 1991. A decade ago, there was plenty of excess capacity in the oil market. After the war broke out in January 1991, prices quickly tumbled from more than $30 a barrel to about $20.

Today, by contrast, it is much more difficult to offset a likely loss of Middle Eastern oil, if the region became embroiled in war. Iraq alone sells 2 1/2 million barrels a day to foreign countries, including the United States, through "oil for food" arrangements approved by the United Nations and through illegal smuggling. Although Venezuelan oil is slowly coming back on stream, as a general strike against populist left-wing President Hugo Chavez winds down, exports are no more than half of prestrike levels.

According to oil analysts, the only country in the world that can significantly increase production levels practically overnight is Saudi Arabia, which has about 1 million barrels a day of excess capacity. In recent weeks, the Saudi government has boosted production to offset losses from Venezuela. But the Bush administration does not want to be held hostage to a potentially unstable Arab country rife with anti-Americanism that has previously used the oil weapon against the United States.

"We shouldn't allow U.S. national security to be dependent on decisions in Riyadh, when the president has the ability to take those decisions," said Edward L. Morse, who was responsible for international energy policy at the State Department during the Reagan administration. "The Strategic Petroleum Reserve allows the U.S. government to put much more oil onto the market [in the short term] than we can get from the Saudis."

How much oil should be released from the reserve, and under what circumstances, is the subject of great debate among energy specialists. President George H.W. Bush was criticized for not acting after the Iraqi invasion of Kuwait in August 1990, as a result of which oil prices rose as high as $40 a barrel. He finally ordered a limited drawdown of 33.75 million barrels on Jan.16, 1991, the same day he announced that U.S. warplanes had begun attacking Baghdad. By the time the oil reached the market, prices had fallen sharply, and the crisis was largely over.

Last week, as the price of light sweet crude rose to more than $36 on the New York Mercantile Exchange -- a 26-month high -- calls for the release of oil from the reserves came from airlines hit by soaring fuel costs, refineries suffering from a lack of Venezuelan oil and senators worried about the rising price of gasoline for their constituents. Oil industry executives oppose the release of oil from the reserve, except in a national emergency.

The Bush administration is keeping its options open. Energy Secretary Spencer Abraham said last week that the reserve should be used only in the event of severe supply disruptions, and not to bring down prices.

The Strategic Petroleum Reserve dates to 1975, in the aftermath of the Arab oil embargoes against the United States and other Western countries that followed the 1973 Yom Kippur war. Traumatized by spiraling oil prices and long lines for gasoline, Congress passed the Energy Policy and Conservation Act to protect the country from sudden interruptions in supply.

During its early years, the reserve was plagued by technical problems and cost overruns, as the Energy Department struggled to adapt the salt caverns along the Gulf of Mexico to the long-term storage of oil. The goal President Jimmy Carter established in 1977, of filling the reserve with 1 billion barrels of oil by 1985, remained a mirage. Through a perverse bureaucratic logic, the government tended to purchase oil when it was scarce and expensive, because that was when political pressure was greatest to fill the reserve.

Apart from the Desert Storm drawdown, the reserve has rarely been touched. In 1996 and 1997, President Bill Clinton authorized nonemergency sales of 28 million barrels to raise revenue. In September 2000, he ordered an exchange of 30 million barrels of oil to bring down heating oil prices in the Northeast, a move that Republicans criticized as an election-year ploy. By the time Clinton left office, the oil stockpile had dwindled to 540 million barrels.

After the Sept. 11, 2001, terrorist attacks on New York and Washington, the reserve assumed much greater strategic importance. The Bush administration is now committed to filling the reserve to its 700 million barrel capacity. It is also considering ways to reach the original target of 1 billion barrels, which would require $3 billion to $6 billion of new investment in infrastructure and oil purchases.

While the salt caverns along the Gulf of Mexico are fuller than ever, the United States' ever-rising consumption of petroleum means the reserve actually offers less protection against market disruptions than it did a decade or two ago. In 1985, according to Energy Department figures, there was enough oil in the reserve to replace 115 days of lost petroleum imports, more than double the present figure.

"In order to continue to have as much protection as we had 10 years ago, the reserve needs to be substantially increased," said James A. Placke, a senior associate with Cambridge Energy Research Associates. "As we become more and more dependent on foreign sources of supply, you need a cushion to fall back on. Otherwise, the world's sole remaining superpower will be quite vulnerable to events over which we have little control."

Others argue that the road to energy independence lies through drastic conservation measures and investment in new sources of energy, such as ethanol and biofuels, to reduce the United States' dependence on Middle Eastern oil. They say the United States now imports nearly 60 percent of its energy from abroad -- mostly from authoritarian countries, such as Saudi Arabia, Iraq, Nigeria and Venezuela -- and that figure could rise to 70 percent by the end of the decade.

"Continuing to fill the reserve is taking us backwards, not forwards," said Rep. Marcy Kaptur (D-Ohio), one of three members of Congress to vote against an increase in the size of the Strategic Petroleum Reserve. "We need a strategic energy policy, not a strategic energy reserve."

© 2003 The Washington Post Company

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