<a href=www.arutzsheva.org>Arutz Sheva, 13:11 Jun. 20, '03 / 20 Sivan 5763

Ain al-Yaqeen, a Saudi-backed internet magazine, included in a recent edition a series of news briefs regarding the oil industry in Saudi Arabia.

"Saudi Minister of Petroleum and Mineral Resources Ali Ibn Ibrahim al-Naimi," reported Ain al-Yaqeen, "affirmed that all Oil producing countries are carrying out important roles and that relationships among them are on 'sound footing'." The minister reassured his audience at the 10th International Caspian Oil and Gas Exhibition and Conference, in Baku, Azerbaijan. He said, "Oil is still the indispensable fuel for today's ever-industrializing world and it will certainly not relinquish its primary position over the next three decades at a minimum." Until then, he explained, the demand for oil will grow by up to "a full 40% of today's production." In order to meet that demand, the internet newspaper quoted the Saudi minister, the oil industry will require an "environment of stable oil prices, and will require large and continuing investments in all parts of the world and at all levels of industry."

In another cross-cultural oil industry moment, the Oil Ministers of the Kingdom of Saudi Arabia, Mexico and Venezuela issued a joint statement on current international oil markets, reports the Saudi media. Following a tripartite meeting in the Spanish capital of Madrid, Minister al-Naimi, the Mexican Energy Minister, Ernesto Matenz, and the Venezuelan Minister of Petroleum and Mineral Resources, Rafael Ramirez, said that, thanks to cooperation between member states of the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC countries, producing countries have been able to supply international oil markets with petroleum requirements. The oil-producing states, the ministers continued, used their recent surpluses to alleviate some potential crises; however, they also cited the importance of the return of Venezuela, Nigeria and Iraq to normal oil production. "The statement stressed the importance of the continuation of cooperation between the three countries to achieve their goal of oil market stability, in the interests of producer and consumer countries, the oil industry and the global economy," reported Ain al-Yaqeen.

But not all international oil-based relationships go smoothly... Saudi Arabia recently cancelled a $15 billion gas project, the largest in nearly 30 years, with the Exxon Corporation. The cancelled project, known as Core Venture One, was also to have involved such corporations as Royal Dutch Shell, BP and Conoco Phillips. Exxon and fellow consortium members were to develop gas reserves in the South Ghawar field in Saudi Arabia, reports Ain al-Yaqeen. No reasons for the cancellation were reported.

<a href=www.vheadline.com>Venezuela's Electronic News Posted: Tuesday, June 03, 2003 By: Andrew McKillop

VHeadline.com petroleum industry commentarist Andrew McKillop writes: Record economic growth and high oil prices ... the US economy attained it highest-ever post-war growth of real GDP ... achieving what today would be the completely unthinkable rate of 7.5% ... in the Reagan re-election year of 1984. Before inflation adjustment, the economic growth number was about 10.75%.

In the whole postwar period, from 1945-2003, the US has never exceeded that rate of growth. At the time ... in dollars of 2003 corrected for inflation and purchasing power parity ... the oil price was around $60/barrel.

Those well-publicized economists and journalists who claim that “high oil prices hurt growth” must explain this simple fact of US economic history ... or abandon their constant call for cheap oil as the ‘passport to growth.’

Before that year of record US growth, in 1980-82, the industrialized world had experienced its deepest recession since the 1930s, with interest rates attaining extremes today associated with the meltdown process in Latin American and African countries unable to achieve ‘structural adjustment’ ... US base rates exceeded 22%/year in 1981.

In other developed countries, national governments vied with each other to crank interest rates ever higher, in a race to cut economic activity, and to slash demand for oil, thus cutting its price and the inflation that economic and business milieu believed was solely due to oil price rises.

The extreme interest rates of the time, however, themselves limited any rapid fall in inflation for the simple reason that more expensive money was added to the list of things that got more expensive, and geopolitical uncertainty maintained oil prices at very high levels, just exceeding $100-per-barrel in today’s dollars, in early 1979.

• Through 1980-82 world stock markets therefore plunged, wiping out the gains they had made during the fast recovery and economic expansion of 1975-78, following the 1973-74 Oil Shock, but after which interest rates had not been violently raised.

Today, the world’s oil supply system is both fragile and stretched to the limit. Several key suppliers, both large and small, are intensely exposed to the sequels of many years in which oil revenues, in real terms, retreated each year. Not only have their installations and equipment been neglected, not renewed or given reduced maintenance, but their economies and civil societies are exposed to the stress and tension that declining real revenues entrain.

In the worst case of national unrest, civil war or military conflict, production and exports can rapidly diminish or even be shut down to almost nothing. The loss of even 5% of world supplies (about 3.9 million barrels/day), if maintained over a few months, would likely trigger a free-for-all bidding spree on the world oil market that could push oil prices above $75/barrel. This context could then entrain finance ministers of the OECD countries into a round of interest rate hikes, despite the almost unlimited risks this would bring for world stock markets and the world economy at this period in time.

Using the interest rate weapon would be suicide, today

Through 2000-2002, and into early 2003 world stock markets suffered a slow motion meltdown, pushing index levels back to those of the mid-1990s. Since the end of the Iraq War there has been no substantial and convincing recovery.

Total losses of notional ‘value’ on world stock markets are around $ 6 000 Billion. Attempts at explaining this as wholly or mainly due to oil price rises since late 1998, when the most recent trough in prices was reached (about $9.70/barrel or well below the real price in 1973) have a hollow ring, and investors above all hope for lower interest rates, which they feel can increase economic growth, or at least limit the rout on stock markets.

Any attempt at raising today’s interest rates to double digit levels in the OECD countries, conversely, would most surely and certainly entrain complete collapse of world stock market indices, runaway ‘domino effect’ bankruptcy of many major corporations, mass layoffs and unemployment, and grave problems for the financing of structural trade and budget deficits of the US, the UK and other countries.

The intensifying fall of the US dollar, depriving commodity exporters whose exports are traded in dollars of real revenues at a time when many minerals and agrocommodity prices outside oil and gas are at near record lows, is itself an increasing downside factor for world economic growth.

Yet recourse to the interest rate weapon when or if oil prices climb through sensitive and psychological barriers, like the $40-45/barrel range, could well intensify the flight from the dollar rather than bring it rapid new strength, while the UK pound might be shielded to some extent by its declining petro-money status, before it is almost inevitably abandoned with UK entry to the Euro. Any use of the interest rate weapon in the face of fast-rising oil prices would likely entrain and OECD-wide recession, and further destabilize the lengthening list of ‘emerging’ economies with severe debt and financial restructuring burdens.

No longer ‘awash with oil’

Current world oil output of about 78 million barrels/day (Mbd) includes that by 24 producer countries whose output is well beyond peak, and falling, with some in decline at over 4%-per-year.

Annual demand increase on a worldwide base is forecast by many influential sources (like the US EIA and OECD IEA) as likely to be above or close to 1.6 Mbd. In less than 6 years, at that rate of demand growth, a “new Saudi Arabia” is required to satisfy the increase in world demand.

• No “new Saudi Arabia” will be discovered, proven, developed and produced.

As the special case of Iraq shows, major producers can almost overnight collapse, with restoration of production capable of satisfying even domestic needs still being quite far into the future at this time.

Oil discoveries, rather than makeover and proving work on older fields, are at best one-fifth of annual consumption on a worldwide base. Underlying this is the simple fact of physical depletion of the world’s geological reserves of oil, as the world moves towards Peak Oil, or the absolute peak of production that can be achieved. This is probably below 85 Mbd.

The expansion of nuclear electric power ... at one time believed to shield against rising oil prices through producing far-from-cheap energy ... is almost everywhere stalled, with the number of reactors in service actually declining (from 443 to 441) in the last 2 years.

No genius is needed to decide what these and other facts strongly imply for oil prices. Using interest rate hikes to provoke a so-called ‘soft landing’ or controlled fall in economic activity, leading to a fall in oil demand and a fall of oil prices if producers do not cut back their export offer as demand shrinks, is a dangerous weapon at this time.

World population growth continues at around 85 million persons per year and the world economy has changed since the early 1980s, and even since the 1990s in which oil markets were “awash with oil,” in the finance and business columns if not in the facts. The oil-lean service economies of the aging OECD countries have massively de-industrialized and outsourced their manufacturing activity, first to the Asian Tigers, and now to China, Brazil and India. This change will itself set a high floor to any worldwide falls in oil demand when or if the OECD bloc decided, foolishly, to engage a round of interest rate hikes to master the challenge of higher oil prices.

Oil price collapse can be bad for the bourse

Through 1986 ... from December 1985 through August 1986 ... oil prices were nearly divided by three, that is fell by about 65% in 8 months, to around $11.50/barrel in dollars of 1986, for many light blends.

Absolutely no spontaneous, self-reinforcing increment to economic growth was recorded in any OECD country. The economic myth concerning oil prices, that ‘cheap oil favors growth’ was proved false, although the high oil prices of around 1983-84, as confirmed by the facts, in no way prevented the US attaining its highest-ever rate of economic growth.

• Worse still, for defenders of Cheap Oil, the 1986 oil price collapse likely contributed to, or even triggered the 1987 Wall street crash.

Following the collapse of oil prices, through 1986-87, there had been a feverish speculative boom of stock market ‘value’, based on expectations of rapid increases in economic growth being generated by cheap oil. No significant growth of the economy or business profits occurred in any major OECD country. As a direct result of this, stock market ‘value’ became completely unrelated to the underlying economy and suffered a major correction in the October 1987 world stock market crash, with a nominal loss of paper value above $1,850 billion. Before the ‘slow motion’ crash of 2000-2002 this was the biggest-ever stock market rout since 1929, the Mother of all Bourse Crashes.

Oil price hikes or interest rate cuts to stimulate growth?

Economic policymakers should understand that if, or rather when oil prices attain $40-$50/barrel in dollars of 2003, and are maintained in that range, global economic adjustment to higher prices can restore economic growth worldwide. The revenue impact of increased oil and energy prices, entraining higher earnings for exporters of energy-intense commodities, can rapidly improve the prospects for growth in the straight majority of the world’s economies.

With or without inflation, higher oil prices that are not resisted by slugging interest rate hikes can ease and speed structural reform and financial adjustment in many, sorely-pressed primary commodity exporter economies.

In the recent context of unstable, low real oil prices, and present context of crumbling consumer confidence in OECD countries due to fears of job losses, terrorism, climate change and other worries in what are essentially consumption saturated economies, few other strategies for restoring conventional economic growth in fact exist.

Lower interest rates (rather than symbolic reductions of a quarter-point) can be discarded as any rational or even possible strategy for the simple reason that US, European and Japanese base rates are at historic lows, in some cases their lowest for 50 years!

Any further cuts in US interest rates, notably, would most surely lead to flight from the dollar and a rapid aggravation of US trade deficits, with increased inflation. This would be dramatically intensified by oil producers shifting to the Euro as their trading currency. Conversely, increased trade deficits for the US due to higher oil prices (and oil imports make up no more than 25% of the US trade deficit at an oil price of $40/barrel) may well at least be contained if some confidence in the dollar can be maintained.

Long-term adjustment to higher oil prices

The writing is surely on the wall for cheap oil, for the very simple reason of physical depletion. Large oil price rises are coming within the next few years. This may be with or without military adventure in Iraq or ‘regime change’ elsewhere, and whatever is done with ‘strategic’ petroleum reserves, the constitution of which always increases total demand.

A structure of higher prices will likely generate relatively rapid falls in oil demand by the OECD North that are more than compensated by increasing demand in the NICs and low income countries, when oil prices continue to move up and through the $60-65/barrel range, due to continued supply constraint and the growth of solvent economic demand in the non-OECD countries. Due to terms of trade and revenue effects entrained by much higher oil prices – most metals, minerals and agro-commodities tracking or exceeding oil prices in their price movement relative to manufactured goods and services imports and purchases ... oil prices at significantly higher, and firmer levels can aid necessary transition of low income countries.

Greater liquidity in the world economy, with relatively low interest rates can enable poorer countries to break free from their indebtedness to the North’s financial institutions, have real freedom of economic policy choices, and avoid development strategies entraining total dependence on fossil fuel-based economies. Their experience of the Neoliberal 1980s should give them reason to consider more autonomous or autarchic domestic development as a better choice than pursuing the impossible strategy of Globalization.

Victims of this, like Argentina and a string of African countries, are there to provide concrete examples of what this illusory policy does to the economy, to the finances of weaker countries, and to human wellbeing.

Oil price triggered change in rich countries

Conversely, in the OECD North and particularly the USA, oil price rises to around $60-70/barrel will firstly and mainly provide a ‘wake up call’ not only for their stagnant economies, but for needed restructuring of the economic system and cultural values.

Apart from hand-wringing and tub-thumping, and of course military adventures, there will be little margin of action and decreasingly few options open to political and economic decision makers.

As noted above, the ‘interest rate weapon’ at this time is more than a double-edged sword; cranking interest rates to double-digit levels in reaction to oil price rises driven by physical depletion is not only unreasonable but will almost certainly bring about another 1929 crash and Great Depression.

In addition ... and within about 12 months from any upcoming Oil Shock ... increased solvent world demand will trickle up to the OECD North, in the form of increased demand for higher value manufactured goods and sophisticated services supplied by the North.

Shrinking growth of oil production due to geological depletion will tend to lock on oil prices at higher levels. Soon we will no longer hear, even less believe, that the world is awash with oil.

Maintained higher levels of world oil and energy prices, and prices for energy-intensive commodities ... that is real resources ... will enable and facilitate long-delayed, but inevitable structural changes of the energy intense OECD North economies.

Overall restructuring, both social and cultural, as well as economic, can easily achieve large compression of per capita oil demand. In the USA, currently using about 26 barrels per person/year, and without serious harm to strictly defined human wellbeing, demand compression could target as much as 60%-75%.

• In Europe at least 33% cuts could easily be targeted without civil war and famine being in any way possible or probable.

Conversely, low income countries where per capita oil demand in rural areas can be well below 1 barrel/person per year cannot reasonably be expected to further compress their demand, to ease price pressures for the OECD North

No way out but restructuring

Current leaderships of the North will, this decade, learn that no amount of munitions and ordnance can solve or defeat the geological problem of oil depletion.

Some current leaderships of the North already produce ‘landmark speeches’ about the need to shift to renewable energy some time after 2050.

In fact, even by 2025, per capita oil use will be about 40%-50% down on today and the climate and environment consequences of continued high rates of fossil fuel burning will be impossible to deny.

Sooner, and not later, therefore, it will be understood that there are no military solutions to geological problems of fossil energy depletion. International cooperation, an almost forgotten term from the 1970s and early 1980s, when oil prices attained about $100/barrel in dollars of 2003, should rapidly be reinstated as the way forward to preparing all persons, both in the North and South, for a future in which at least two-thirds of our current and easily producible supplies of ‘conventional’ oil and gas will be exhausted by about 2035.

Andrew McKillop  is a former expert, policy and programming, Divn A - Policy, DG XVII-Energy, European Commission, founder member, Asian Chapter, Intl Assocn of Energy Economists. You may contact Mr. McKillop by email at andrewmckillop@onetel.net.uk

<a href=www.nytimes.com>The New York Times April 13, 2003 By NEELA BANERJEE

FOR weeks, oil prices have swung wildly on news from the battlefronts in Iraq. But the painful truth is that Iraq is only the most extreme example of the world's reliance on hot spots to slake the thirst for oil.

Through the winter, oil prices climbed steadily, not only in expectation of another Persian Gulf war but also because political strife in Venezuela was choking off that nation's exports. As the fighting began in Iraq, ethnic clashes in Nigeria's oil-rich Niger Delta forced Royal Dutch/Shell, ChevronTexaco and TotalFinaElf to shut down their operations there, slicing the country's oil production by almost 40 percent.

Demand for oil continues to rise, bumped ever higher by the growing prosperity of emerging markets like China and India and the unquenchable demand of the United States, by far the world's largest consumer of oil.

The upshot of all this, energy experts say, is a global oil industry and world oil markets that are more volatile and unpredictable than they have been in a decade.

Increasingly, oil companies are shying away from holding large stocks of oil and drilling every time oil prices rise, for fear of the financial hit that comes when oil prices plummet. Without that extra cushion of oil at refineries or in storage, consumers have begun to feel every swing of oil prices — and will continue to do so for the foreseeable future. "Volatility is the norm, not the aberration," said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation.

OPEC, the cartel that spurred past oil crises by cutting off exports to the West, now tries to steady the market, with Saudi Arabia, Kuwait and others priming the pumps when less-stable producers falter. Under American influence, if not outright control, Iraq's huge reserves may offer further ballast in an uncertain energy world.

But industry experts say the unavoidable reality is that the search for diverse sources of oil — a keystone of American policy — is sending the oil industry into one fraught corner of the world after another. And the discovery of oil is itself almost a guarantee of conflict.

"People have to stop thinking that oil markets will be affected by embargoes, because embargoes are a thing of the past," said Moisés Naím, a former Venezuelan minister of trade and industry and now editor of the journal Foreign Policy. "The problem is failed states. It's a harbinger of things to come: when internal political turmoil limits oil to world markets."

Prosperity and Consumption

More than anything, the force driving oil companies into ever more perilous parts of the world is the middle-class consumer: the American suburbanite in her sport utility vehicle and the Chinese city dweller behind the wheel of his first car.

Last year, the world burned 76.7 million barrels of oil a day, according to a report by Cambridge Energy Research Associates.

The United States far outpaces any other country in the consumption of oil. With just 3 percent of the world's population, it consumes more than 25 percent of crude oil, roughly equal to its share of the global economy.

But industry experts predict that most of the increase in demand for oil over the coming decades will result from growing prosperity in the developing world, led by China. As people there make more money, they buy more products, including cars. As they leave the countryside for cities, they rely on buses and cabs to move around. By 2030, according to to the International Energy Agency, China will import as much oil as the United States does now.

The American economy is not as reliant on oil as it was 20 years ago, mainly because of significant improvements in energy efficiency and a shift away from heavy industry to service businesses. So when oil prices climb, the economy may slow, but it does not easily sink into recession, analysts and economists say.

Nonetheless, American prosperity stokes this country's appetite for oil — and it shields most consumers from having to adjust their behavior when gasoline prices rise.

Consumers grumble when oil prices spike, but there has been only the faintest evidence that high pump prices are chilling their ardor for S.U.V.'s. In part, that is because recent gas prices of $2 a gallon or more were still lower, when adjusted for inflation, than the record prices 23 years ago.

The Bush administration has backed long-term research into hydrogen to replace crude oil, but that technology — at a competitive price — is still 15 to 20 years away, most experts agree.

In the meantime, the public debate continues over efforts to slow American oil consumption without damaging the economy. Just Thursday, the House of Representatives rebuffed legislation that would compel automakers to increase the fuel efficiency of S.U.V.'s.

Politics and Production

Eager to reduce America's dependence on Middle Eastern oil, the Bush administration has been encouraging the search for oil in new places.

Yet many of the sites that Washington has lauded for their abundant oil resources are political quagmires, one way or another — from the steaming Niger Delta to the frigid coastal plain of the Arctic National Wildlife Refuge.

In Nigeria, the run-up to this month's parliamentary and presidential elections turned bloody when ethnic clashes erupted — in large part over the complaints of the Ijaw tribe that they had been deprived of their fair share of the proceeds from oil development. The violence has largely abated for now, but dozens of Nigerians died, and major oil companies halted production in parts of the Niger Delta for weeks.

Two years ago, Vice President Dick Cheney's energy task force promoted the prospects of big gains in Nigerian production. But the problems have highlighted the risks rather than the opportunities.

Because the sweet crude from Nigeria is particularly good for making gasoline, refineries on the East Coast rely on it, especially as the United States enters the spring and summer driving season. It is still unclear how the temporary curtailment in Nigerian exports will affect American gasoline prices.

Oil and government interests in the United States have nurtured ties to Venezuela for decades, as a conveniently close supplier. But there, too, politics has interfered recently with oil production, as a popular strike against President Hugo Chávez's rule sliced oil exports for months by more than 80 percent from usual levels of about 3.1 million barrels a day.

The government has restored exports to about 2.5 million barrels a day, even as 17,000 oil company employees remain off the job — but not before the oil markets had driven home the vulnerability of supplies that had never been cause for worry.

"Even if there were no Iraq crisis, what happened in Venezuela and Nigeria would have registered at the gas pumps," said Daniel Yergin, chairman of Cambridge Energy Research Associates. "What no one pays attention to is that the disruption of Venezuela was even larger than Iraq.

"The working assumption" in oil markets, Mr. Yergin added, has to be "that there will be political turbulence or other kind of turbulence."

Despite the volatility abroad, most major oil companies, including American ones, are steadily shifting their investments away from the United States. Oil production is declining in the United States, where proven reserves are small. For big payoffs, companies are turning to more technologically challenging — and therefore more expensive — areas here, like the deep waters of the Gulf of Mexico.

But sites in the United States come with their own political perils. The administration and its Congressional allies, for example, see the Arctic National Wildlife Refuge in Alaska as the next big drilling opportunity in the United States. Yet opposition from many Democrats and environmental groups has for years kept the refuge off-limits for exploration.

The seemingly endless battle has quelled the oil industry's enthusiasm. Though oil companies publicly back the administration, most executives say in confidence that they would rather look elsewhere. No one really knows how much oil is in the refuge, they say, and they worry that drilling would be stymied for years by legal fights — or that leases would be reversed if Washington shifted from support to opposition of development.

This world of uncertainty, industry experts say, underscores the fact that the sole oil producer that can dampen volatility is Saudi Arabia.

When Venezuelan exports plummeted this winter, for example, Saudi production rose sharply — and American imports from Saudi Arabia climbed to record highs.

"Saudi Arabia is the central bank of oil," said Roger Diwan, a managing director at PFC Energy, a consulting group. "When things go wrong, they deliver. They always do things that are good for oil markets, and they know that extreme prices and disruptions are not good."

Prospects and Technology

The West, though, is uncomfortable relying on the kindness of Saudi Arabia and on other big producers, like Russia and Mexico, that also guard their oil resources jealously.

Big oil companies complain that because they cannot work in many of the world's richest fields, production is growing at a far slower pace than they had forecast just a year ago.

Many American and British companies have core projects in the North Sea, Alaska and the shallow waters of the Gulf of Mexico, all areas where oil production is declining. Earlier this year, BP, Royal Dutch/Shell and ChevronTexaco announced that they had missed their production growth targets for 2002 and would no longer offer forecasts.

The prospects are not all bleak. Competitors are closely watching BP's plans, announced in February, to plow $6.75 billion into a development partnership in Russia.

And as the Bush administration fashions a plan to govern Iraq after the war, it hopes to foster institutions that make the country a model of peaceful, democratic governance for oil-exporting states. The raw material is promising, regional experts say, including a domestic oil bureaucracy whose managers and scientists are widely respected for their professionalism and lack of venality.

Much closer to home, the United States already has a large, stable supplier of oil in Canada, with proven oil reserves second only to Saudi Arabia's.

Canada supplies 17 percent of American oil imports, more than Saudi Arabia or Venezuela. Conventional oil reserves in western Canada are gradually declining, but they are being replaced by new oil fields off the coast of Newfoundland and Nova Scotia and deposits of tarlike oil sands in northern Alberta.

The drawback of the Canadian oil sands is the high cost of production. "Instead of 50 cents a barrel in the Middle East, it's more like $6 or $7," said Brian Prokop, an energy analyst at Peters & Company in Calgary, Alberta. The oil sands are either mined or extracted by injecting huge amounts of hot water underground, after which the tar is processed into crude oil.

Such technology is the main reason production has remained viable. Another example is deep-water production in the Gulf of Mexico, which would not be possible or economically feasible without the great strides made in seismic technology and drilling methods.

In testimony before Congress recently, Mr. Yergin predicted that new oil technology could expand world oil reserves by 125 billion barrels — more than the proven reserves of Iraq.

"We're in one of those periods when a technological revolution is changing the economics and capabilities of the oil industry," he said in an interview. "What technology does is lower the costs and expand the horizons. And it keeps pushing the day of shortage and depletion out into the future." 

The Capitol By NOI MAHONEY Business Writer

As gasoline prices soar toward all-time highs, Ron Stewart said the higher gas prices are slowly eating into his profits.

With everything from lawn mowers, trucks, tractors and other equipment, the owner of Ron Stewart Landscaping in Annapolis said his company depends on gasoline. But he said he hasn't really thought of passing the costs on to his customers. Instead, he said he will weather the storm and wait for gas prices to drop. "I haven't raised prices," Mr. Stewart said. "I don't think you can raise prices in this market, it's too competitive." Like Mr. Stewart, business owners burdened with record costs for gas said raising their prices to compensate is not a likely option. The problem lies in the ultra-competitive nature of the Annapolis-area market. "High gas prices cut into margins and generally this is passed onto consumers," said Bob Burdon, president of the Annapolis and Anne Arundel Chamber of Commerce. "But we are in a very competitive market, and many local retailers don't want to price themselves out." Gasoline costs about 47 cents a gallon more than a year ago. Self-serve regular gasoline averages a $1.65 a gallon at area gas stations. About two weeks ago, gas prices topped $1.70 for regular. In February, gas prices hovered around $1.66 as compared to $1.55 in January. Mr. Burdon said companies which could be affected by higher gas prices include anyone with sales forces, service technicians, or companies that need to move heavy equipment. "The challenge is not just gas, the war will effect spending habits as well," Mr. Burdon said. Gas price increases reflect the tight inventories and high price of crude oil, caused by falling imports from Venezuela and fears that the war in Iraq could last for a long duration of time. Anirban Basu of Baltimore-based economic research consulting firm Optimal Solutions Group, said the increased gas prices is another hardship on local businesses, which will eventually have an impact on consumers. Mr. Basu said when a company is forced to absorb losses from higher gas prices, it will lead to lower profitability, less hiring, less bonuses and less expansion. "Every recession in recent times was preceded by a spike in energy prices, like the kind we just experienced," Mr. Basu said. Nationwide, economists worry companies will increase their prices to make up for the gas prices. Alan Gin, an economics professor at the University of San Diego, estimated local consumer spending declines $5 million a month for every 10-cent increase in the price of a gallon of gas. "The price of gasoline will take buying power out of the hands of consumers," Mr. Gin said. But in the Annapolis area, which is buoyed by the boating and tourism industry, companies said raising prices could do irreparable damage. The price of marine fuel varies, but is floating around $2.19 for premium and $1.49 for diesel. Larry Kety, manager of the Annapolis City Marina, keeps a close eye on wholesale prices. "It is tough with our market," Mr. Kety said. "We are a big company, but we try to be the nice guy in town. We don't want to take advantage of our customers."

nmahoney@capitalgazette.com

Read more By Andrew Caffrey, Boston Globe

Regardless of what happens in Iraq, American drivers could see another bout of high pump prices this summer because of political tensions elsewhere in the world.

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 bid up prices.

Meantime, Venezuela's state-owned petroleum industry, which still hasn't fully recovered from the civil strife begun last December, is in such poor condition that some analysts warn it might see a drop in output.

These developments come when stocks in the United States are so low that the U.S. Energy Information Administration yesterday said "it will likely take many more weeks, or months, before U.S. 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. 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 Massachusetts consulting firm.

Another looming worry: disquiet among oil workers in Colombia that could lead to a strike. If Colombia "went down, clearly we would be looking at a very tight situation for the U.S. 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 U.S.-led military coalition was heading to swift victory in Iraq. That 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 U.S. economy, and to compensate for lost Venezuelan and Iraqi suppliers. Indeed, some analysts are now 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 U.S. 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 and warn that production might fall further.

Meanwhile, the situation in Nigeria remains highly volatile since the violence that erupted in the West 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. 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 West 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.