www.thestar.com Mar. 8, 2003. 01:00 AM

Venezuelan strike, cold winter drain U.S. fuel reserves Record gas prices likely this summer, Washington warns

NEW YORK—World oil prices hurtled higher again yesterday as the United States and Britain set a March 17 ultimatum for Iraq to disarm or face war.

A revised draft resolution circulated at the United Nations by British Foreign Secretary Jack Straw, backed by Washington, gives Baghdad 10 days to meet U.N. demands.

The two allies during that time hope to garner support in the bitterly divided 15-member United Nations Security Council for military action against Iraq, which ships around 4 per cent of world oil exports.

U.S. light crude climbed 78 cents to $37.78 a barrel, barely $2 short of a recent 12-year high. Brent crude futures rose 57 cents to $34.10 a barrel, a two-year high.

"News of that deadline is certainly keeping the market very strong," broker Christopher Bellew of Prudential Bache said in London. "Any final deadline will give the market another shove to the upside," said Tom James of Carr Futures.

Oil prices have jumped 20 per cent this year on fear that war in Iraq will hit exports from the Middle East, which pumps a third of the world's oil. Oil is almost 60 per cent more expensive than it was a year ago.

There also is growing concern that rising energy costs will strain a weak U.S. economy.

Iraq's March 17 deadline puts pressure on the Security Council to adopt the resolution as soon as possible. The United States and Britain intend to bring the issue to a vote on Tuesday, diplomats said.

An oil workers' strike in Venezuela and strong heating demand in a bitter northern winter have drained U.S. fuel stocks.

"It's still bitterly cold, and we just got six inches of snow,'' said T.J. Herlihy, a broker at Spectron Energy Inc. in New Canaan, Conn. "Winter's not over yet."

Washington warned Thursday that gasoline prices would hit record highs this summer.

Saudi Arabia, the biggest producer in the Organization of the Petroleum Exporting Countries cartel, has said it will raise production to meet any shortfall international market.

Consumer countries represented by the Paris-based International Energy Agency have also said they will release emergency stockpiles for the first time since the 1991 Gulf War if necessary.

Despite rising energy prices, the White House says U.S. President George W. Bush is inclined to tap America's Strategic Petroleum Reserve only in the event of an emergency.

reuters news agency

www.dailystar.com.lb

How high could oil prices rise if the war on Iraq does take place in the days or weeks ahead would depend on how long the fighting lasts and how much damage Iraq’s oil fields sustain. The most likely scenario is for oil prices to surge toward the $40 a barrel for Brent crude before assuming a declining trend in the second half of the year. The uncertainty associated with the looming war on Iraq has pushed oil prices above $33 a barrel for Brent crude from less than $20 a year ago. On the supply side, there has been a sizeable cutback in petroleum production by Venezuela because of the political crisis there while, on the demand side, the exceptionally cold winter in the US and Northern Europe boosted consumption of heating oil. Furthermore, the US administration has given orders to increase America’s strategic petroleum reserves ú estimated at 700 million barrels ú enough to meet US needs for 63 days. The process of boosting reserves is expected to be completed by early March 2003. The US, which has only 2 percent of world oil reserves imports 55 percent of its total oil consumption needs, with 25 percent of that coming from the Middle East region. The best scenario for Iraq and the region is for the ongoing policy of containment aimed at ending the crisis peacefully to succeed. Under this scenario, the process led by the UN would eventually vindicate Iraq of having weapons of mass destruction, leading to the removal of economic sanctions on Baghdad. With no damage inflicted on Iraq’s oil wells, the country would be able to resume its oil production and execute projects signed with major oil companies to expand the country’s production capacity. Oil prices will lower back to $22 a barrel once the war premium, believed to be around $7 a barrel, is taken out of current prices. Unfortunately, the most likely scenario today is not a peaceful solution but that of a US-led war on Iraq. From what has been leaked so far of the battle plan, American troops hope to descend on Iraq’s oil fields in the early hours of the war to gain control and prevent any sabotage action. Under this scenario, Iraq’s oil production is likely to shut down, perhaps for two to three months, during which the oil fields will be checked for mines and other hazards. During this period, oil prices are likely to peak at $40 a barrel before starting to decline. The prospects of Iraqi crude returning to the market following a short and decisive war and the likelihood that the country will be able to boost production in the coming few years will act as a psychological force on markets, shifting the mood from bullish to bearish. Market participants will start discounting higher future oil production levels, bringing a steep decline in crude prices. Brent crude is forecast to drop below $20 a barrel by summer. The third scenario is that of a war on Iraq dragging on for months. While this scenario is considered by many to be less likely, it should not be ruled out. In this case President Saddam Hussein and his close lieutenants would go underground while troops led by the Republican Guard continue resistance from densely populated sections of Baghdad. Large-scale battles will tail off after a few weeks, but sporadic attacks on enemy forces will continue. Fearful workers and engineers could refuse to operate Iraq’s oil fields, closing them down for several months. In this case oil prices would trade up toward $45 a barrel for Brent crude before falling gradually by year’s end to around $30 a barrel. If troops loyal to the current Iraqi regime decide that it is both a defense and a form of revenge to sabotage Iraq’s oil fields and were able to do so, the world’s oil market could lose a good portion of Iraq’s output. This would put more upward pressure on oil prices, add to the cost of rehabilitating Iraq’s oil production capacity and severely handicap the country’s post-war economic recovery. After the end of the crisis, Iraq is expected to pursue the expansion of its crude oil production in two phases. The first phase, the recovery phase, is likely to last one to two years and would cost up to $5 billion. Major oil service companies would help Iraq restore its production capacity from the current 2.5 million barrel per day (mbpd) average to the 3.5 mbpd level that prevailed in July 1990, just before Iraq invaded Kuwait. The second phase, the development phase, will take much longer and will be aimed at doubling Iraq’s production capacity to 7 mbpd by the year 2010. Here the world’s largest oil companies including those from the US, the UK, France, Russia and Italy, will compete for lucrative contracts with the new government of Iraq. Baghdad’s desperate need for money to rebuild an economy ravaged by 13 years of sanctions and a heavy debt burden of $140 billion will lead it to accept to sign production sharing agreements with the major oil companies. Iraq has an estimated 112.5 billion barrels of proven oil reserves, the world’s second largest after Saudi Arabia. However, only 15 of its 74 discovered oil fields have been developed and just 125 of the 526 known oil deposits have been drilled. This is why the potential for Iraq to almost double its proven reserves is quite high once the entire acreage is mapped. Unlike the Caspian region that saw sizeable increase in crude oil production in the 1990s, Iraq’s crude oil is easier to access and to export. The country has the added advantage of being able to transport much of its output through the Mediterranean sea via pipelines to Turkey, Syria and Lebanon and through the Red Sea via pipelines to Saudi Arabia. Iraq is believed to have contracts worth about $38 billion pending with companies such as Italy’s ENI, UK’s and Holland’s Royal Dutch-Shell, Australia’s BHP, France’s TotalFinaElf, and Russian giant Lukoil. However, no development work has actually started on these deals because of the UN sanctions imposed on Iraq which have also precluded American companies from doing business in the country. France is by far the biggest player. The giant TotalFinaElf has development rights to roughly 25 percent of total Iraqi reserves. In theory, France’s long relationship with Iraq’s national oil company could put the French in a good position for more deals after any war. But at the moment, many French industry officials remain convinced that the Americans will not allow French oil companies to work in Iraq if France fails to support the war effort. That’s why French observers believe that when the final decision is to be taken by the UN, France is unlikely to block it with a veto, in order to protect its future oil interests. Russia is in an equally delicate position as well. While wanting to constrain US power, it is unlikely that Russia will jeopardize lucrative oil contracts signed with Iraq. Baghdad owes Moscow $8 billion in Soviet-era debt. In 1997, Lukoil signed a $3.5 billion, 23-year deal to revive Iraq’s Al-Qurnah field, which has 7.8 billion barrels of proven reserves. But the accord was put on ice after President Putin’s support for the US-led sanctions drive. The short- and medium-term outlook for oil prices and their impact on economic growth prospects both of the region and the world will, therefore, depend on the outcome of the present Iraqi crisis. The worst scenario is clearly the status quo, whereby the crisis continues to drag on for months without a solution, leading to a protracted period of uncertainty associated with higher oil prices and weak world economic growth.

Henry T. Azzam is the Chief Executive Officer at Jordinvest. He wrote this commentary for The Daily Star

www.activedayton.com A Dayton Daily News Editorial

The recent spike in gasoline prices seems not to have been met with as much skepticism as past spikes. This time, drivers, and especially hard-hit truckers, are irritated, but Americans seem to be assuming that the current problem is related to the looming war in oil country.

In fact, the recent hikes probably have as much to do with the problems of Venezuela as those of Iraq. Venezuela is a huge contributor to the pool (so to speak) of oil from which this country draws. And it has experienced a devastating oil strike.

Every time there's a spike in oil prices, there's a chorus that (rightly) says this country needs to be more serious about lessening its dependence on international oil. Since the major oil shortages and price hikes of the 1970s — a time when the nation's leadership talked a lot about the need to change our ways — progress has been minimal. Our use of foreign oil has shrunk as a percentage of our national wealth, but not in real terms.

In truth, though, the United States is not as dependent as many other modern countries, because it does have some oil of its own. Japan and Europe, for instance, are far more reliant on Mideast oil.

That's a fact that should be kept in mind by those who insist that the looming war is fundamentally about Iraqi oil. If that were true, European governments presumably would be more favorably disposed to the war than Washington.

The United States does need oil to flow freely, of course. But if Washington and London were single-minded about that, they would be finding a way to get along with Saddam Hussein, so as to get Iraqi oil.

No matter how independent this country might become of Mideast oil, Washington will still have to worry about oil flowing freely, because the United States needs healthy trading partners abroad to buy our goods. And our trading partners will continue to need that oil for a long time.

The United States can and should move in the direction of energy independence. But it should do so soberly, with its eyes open. True, American dependence on oil has done much to shape the modern Mideast and its governments. But a greater degree of American independence now would not change the current situation in Iraq much or greatly lessen American interests in the Mideast.

[From the Dayton Daily News: 03.08.2003]

www.irna.com

Vienna, March 8, IRNA -- Venezuelan Energy and Mines Minister Rafael Ramirez has said here that by the end of this month his country expected to reach its crude oil production quota of 2.819 million b/d, assigned by OPEC.
The OPEC News Agency (OPECNA) reported here today, he was quoted as saying that Venezuela once again would occupy, "its role on the world market as a stabilizing country and secure oil supplier, news that has been received by our clients as excellent and encouraging".
The minister noted that during the last OPEC meeting towards the end of 2002, Venezuela defended its quota, explained the true situation of "a terrorist sabotage to which it was subjected", and guaranteed that it would return "with all its production volume, which we are about to recover".
Ramirez said: "We are sure that we are going to recover nationalproduction during the first half of this month to its normal level of about three million b/d, which will allow us to re-establish the production quota set by the Organization.
"Therefore, we will participate in the ordinary conference scheduled for the middle of this month in Vienna, where we will take up again our commitment and confidence with our international clients who have increased in recent days," noted the minister.
"We are recovering our oil production in a sustained fashion. Currently it is above 2.5 million b/d, and within hours will be at 2.8 million b/d, which means that we will not only be at the required level for the internal market, where gasoline
production is at 60 per cent, but additionally will allow us to
strengthen exports," he added.
MN/NA/AR
End

news.mysanantonio.com By Analisa Nazareno San Antonio Express-News Web Posted : 03/07/2003 11:37 AM   Despite an Arab oil embargo that pounded the nation's economy into recession and efforts since then to curtail dependence on foreign oil, the United States imports even more oil today than it did 30 years ago.

In the late 1970s, when oil prices spiked because of turmoil in Iran, the nation's motorists and corporations consumed 17 million barrels of oil a day, with 40 percent from foreign sources.

Today, the nation consumes an additional 2 million barrels a day, and nearly 60 percent comes from foreign sources - with Middle East nations as the greatest source and volatile Venezuela as another big supplier.

And with the nation at the brink of war against Iraq, economists and environmentalists alike are calling for renewed focus on the nation's energy plan.

"We're not in an energy crisis now, but the stage is set for tragedy," said Joe Fulton, the director for research and environmental management for City Public Service. "The energy policy that the president introduced in 2001 was the beginning of an energy plan, but that's been put in the drawer, and it's gathering dust and it needs to be pulled out and discussed.

"Venezuela is on the verge of anarchy. The Middle East is in a state of perpetual turmoil. And Nigeria has its problems. Our main sources of oil are in geopolitically unstable places in this world, and there needs to be a plan that addresses this."

Fulton argued that the Energy Department needs a more coherent energy plan that includes deadlines for goals.

That plan would have to be hashed out by environmentalists and automobile manufacturers, energy suppliers and economists, who all bring different perspectives to the table.

Economists such as Milton L. Holloway argue that the only viable solution to the nation's oil dependence is the one that the market works out.

"We can create a long-term solution through the introduction of new technologies - if they pass the marketplace test," said Holloway, an Austin-based energy consultant who has advised Exxon, Ford and the Texas Department of Transportation. "Otherwise, the right answer is to let the marketplace dictate the solutions and keep the world oil market reasonably stable so that prices don't go sky high."

And environmentalists such as John DeCicco argue that the long-term solution is regulation - more stringent emissions and fuel mileage standards for new automobiles.

"If a political commitment was made, and if the government held car companies' feet to the fire, and we said, 'I don't care how you do it, just make cars cleaner,' then we would go a long way in cleaning the air and decreasing our dependence," DeCicco said. "I don't see any other way around our foreign oil dependence."

One other thing the two agree with is that the United States and its economy - because of the wide availability of gasoline and its relative cheapness - is almost hopelessly dependent on oil.

"We've got this infrastructure for making and selling gasoline built up to last 80 to 90 years It took almost a century to get gasoline on every corner in every major city," DeCicco said. "It's going to take a long time for alcohol and (compressed natural gas) or propane to develop that kind of infrastructure."

And it would take decades before the technology for cars powered by hydrogen fuel cells becomes affordable for that sort of infrastructure to develop.

Meanwhile, the Energy Department is projecting demand for oil to grow by 1.8 percent each year for the next 20 years.

This continued consumption, plus an impending war in the Middle East, has placed the nation's economy in a more vulnerable position today - even with the price and supply controls of the Organization of the Petroleum Exporting Countries.

"Before we talk about getting to freedom from oil, we have to talk about when are we going to put a cap on growth," DeCicco said.

Despite decades of developments in alternative fuels and regulations requiring automakers to produce vehicles capable of operating on such fuels, the use of them is almost miniscule.

Alternative fuels - ethanol, biodiesel, propane, natural gas, coal and battery power - make up less than 3 percent of the nation's automobile fuel consumption.

City Public Service, like many companies, started experimenting with electric-powered cars and alternative fuels during the oil crisis of the 1970s.

"The goal was to wean the United States off of imported oil," Fulton said. "It was not an environmental imperative, and it didn't have to necessarily be a clean fuel. The requirement was that the fuels just have to come from the United States."

The company's extensive experiments are like case studies in the political pitfalls and technological challenges of using alternative fuels.

The battery-powered cars the energy company used in the 1970s died out soon after charging up - in parking lots or on the street.

Its recent nine-month experiment with biodiesel seemed successful - the company fueled its 1,500 diesel engine tractor-trailers, trucks, forklifts and other vehicles with the processed vegetable and animal fat.

But the experiment came to a halt when the vehicles started sputtering because of congealed residue in the engines.

By the end of the year, the energy company plans to start using an ethanol and gasoline blend called E-85 on its 100 Ford Ranger and Expedition trucks and 30 Taurus sedans.

But the fuel is largely unavailable in Texas, although it is more widely sold in Midwestern states. City Public Service will have to dedicate a tank and station to the fuel and contract with an out-of-state supplier.

"Ethanol is not yet a big factor here in Texas, but we're trying," said Melissa Gutierrez, fleet operations engineer for City Public Service. "If we can get ethanol here and bring it to our fleet, that might bring some tread for the fuel to the city."

Federal laws require companies such as City Public Service to buy cars capable of operating on alternative fuels. And for building the cars, automakers get credits they can then use to build bigger-engine vehicles.

Because of the law, nearly 3 million cars with "flex-fuel" engines capable of running on either E-85 or gasoline are on the roads today. But because the ethanol fuel is not widely available, most fleet operators use gasoline.

And because fleet operators - with the exception of a few such as CPS - are not demanding the fuel, ethanol producers don't have the capability of supplying more than 10 percent of the nation's fuel consumption.

Environmentalists call this conundrum the "dual-fuel loophole."

"There's no requirement that any of these vehicles use any of that fuel," said Bill Prindle, the deputy director for the American Council for an Energy-Efficient Economy. "The evidence is that there's virtually no change in alternative fuel use, and what we're proposing is, if we're going to keep requiring fleets to include these dual-fuel cars, then we ought to tie the regulations to actual sales of these biofuels. We ought to give credit for credit that's actually earned and don't just give it for nothing."

Like DeCicco and Fulton, Prindle said the nation needs to discuss energy consumption and develop an energy plan that will clearly spell out goals.

Prindle said such a plan ought to include improved automobile fuel economy standards and incentives for automakers to develop the technology through tax incentives.

Ethanol distributor Jim Peeples of AAE Technologies Inc in Newark, Del., said such a policy would require fleet operators to use alternative fuels.

Fulton said he believes any energy policy would be the result of sacrifice and compromise.

Environmentalists might have to concede protection of some federal parks to get increased fuel economy standards. Automakers might have to build more expensive, energy-efficient engines if they want to continue building large trucks. Motorists might have to pay higher prices for cars and domestically drilled oil if they want more stable gasoline prices.

"We have a problem," Fulton said. "I don't have a solution, other than to say that smart people have to work together. And even if they have different objectives, they have to come up with a comprehensive, integrated energy policy. And that will not be an easy job."

anazareno@express-news.net   03/07/2003