Cost of war Daniel Altman The New York Times Saturday, March 22, 2003   NEW YORK The cost to the United States of the war in Iraq and its aftermath could easily exceed $100 billion, according to evidence massed by experts from Wall Street, Washington and academia. In the opinion of several economists and military analysts, the government's wartime spending will be just the tip of a towering iceberg. The burdens that follow - from occupation, reconstruction, humanitarian aid and checkbook diplomacy - could extend well into the coming decade. Overall effects on the economy could also stretch far beyond the bill for taxpayers. The uncertainty that preceded the war already exacted a severe cost in terms of economic growth. Changes in oil prices, insurance premiums and the attitudes of consumers and corporate leaders - all of which may depend on the war's outcome - will determine what comes next. "If we get through this without major damage to Iraqi oil facilities, and without any kind of terrorist action, and relatively quickly on the military front, I would think that would be good for the economy," said Peter Hooper, chief United States economist at Deutsche Bank Securities. The war itself is likely to cost between $22 billion and $60 billion, according to calculations made last year by the Congressional Budget Office and the House Budget Committee's Democratic staff. Peace-keeping in Iraq and rebuilding the country's infrastructure could add much more. A report to be released Monday by Taxpayers for Common Sense, an advocacy group, priced a possible five-year deployment of 50,000 troops - the American share of a 100,000-strong force - at $66 billion. The United Nations Development Program has estimated the cost of humanitarian aid and economic recovery, including rebuilding infrastructure and civil institutions, at about $10 billion a year for at least three years. Taxpayers for Common Sense put the total cost of the world's engagement with Iraq at $544 billion, spread over 10 years. But the United States may not have to bear all of that cost. "There's starting to be some evidence that we're going to have some friends come in on this, it's just a question of how much they're going to contribute," said Keith Ashdown, the group's vice president for policy. Some European countries have talked about offering aid, he noted, but only Japan has made a firm commitment, of about $1 billion. The Bush administration has stayed tightlipped about the cost of the war and reconstruction since December. At that time, Mitchell Daniels Jr., the White House's budget director, mentioned a range of $50 billion to $60 billion for military costs - far lower than earlier estimates of $100 billion to $200 billion made by Lawrence Lindsey, formerly the White House's top economic adviser. Both the White House and the Pentagon refused to offer any definite figures Friday, but Claire Buchan, a White House spokeswoman, said that the administration would send a budget request to Congress shortly. She added that some funds for postwar aid and homeland security would be included alongside wartime spending. For the economy as a whole, the effects of the war could range from mildly positive to, if the war turns sour, strongly negative. But the most severe repercussions so far appear to have stemmed from the uncertainty that preceded the war, and the high oil prices that came with it. "In terms of growth in the first half of the year, we're going to be somewhere in the vicinity of 2 percent" at an annual rate, Hooper predicted. Without the war-related uncertainty, he said, the economy would probably have been able to expand at an annual rate of 3 percent in the first half. Most analysts agree that a "war premium" partially accounted for the run-up in oil prices in recent months. The strike in Venezuela's oil industry, which has reduced global supply, makes isolating the war's effect difficult, though. Edward McKelvey, a senior economist at Goldman, Sachs, said that he had heard figures of $7 to $10 a barrel for the premium in the first quarter of this year. A premium of $10, he said, would cost consumers about $50 billion a year. Still, he cautioned, "you don't have any really good sense of where the baseline was." A recent estimate by the Center for Strategic and International Studies put the premium far lower, at $2 or $3. Blaming the war for weaker retail sales and a lack of hiring might be a step too far, though, McKelvey said. "How much of that's war uncertainty, and how much of it's other stuff? We would tend to go with other stuff." In any event, the war premium appears to be disappearing. Oil prices have dropped to about $27 a barrel from a peak of about $38 on March 7. If this trend holds, the war's indirect impact on the economy could be minimal, according to a study by William Nordhaus, a professor of economics at Yale University. In a worst-case scenario, which now looks less likely, a price spike could cost as much as $391 billion over 10 years. "Looking at the extent to which oil prices have dropped in the last couple of days, and the stock market balance has risen, it's so far going according to a relatively optimistic script," Hooper said. But he warned that the optimism could be short-lived. "If Iraq is resolved successfully, there are other potential geopolitical clouds on the horizon."

Oil prices plunge as Iraq fields secured

March 21, 2003, 3:49PM Reuters News Service

NEW YORK - Oil prices deepened a week-long plunge today to hit four-month lows as U.S. and British forces secured key Iraqi oilfields and ports, calming market fears of widespread destruction by Iraqi troops.

A big wave of extra OPEC oil arriving in the West, replacing supply lost from war-torn Iraq, also helped ease the threat of shortages.

U.S. crude plumbed a four-month low of $26.30, ending the day down $1.12 cents at $27.00. Brent crude oil futures in London fell $1.15 to $24.35 per barrel, having also hit a four-month low.

The value of oil has dropped by 30 percent in a week, having peaked at nearly $40 last month.

"The capture of key oil facilities intact is adding to bearish sentiment," said Tony Machacek, a broker at Prudential-Bache International.

British Defense Chief Sir Michael Boyce said all key components of the southern Iraqi oilfields, which normally pump half the country's output, had been secured.

British troops also captured Iraq's Faw peninsula on the Persian Gulf, a strategic oil export route.

"We are trying to make sure that the economic infrastructure of Iraq is left as intact as possible," said Boyce.

Only seven oil wellheads had been torched in the south, less than the 30 previously reported, although oil-filled trenches were also ablaze, he added.

He could not confirm reports that Iraqi President Saddam Hussein may have been killed or injured in the first wave of attacks.

The wellhead fires are a long-term worry for oil markets, but have no immediate impact on supply because Iraq's Gulf exports stopped Monday and this has already been factored into prices, said Leo Drollas of London's Centre for Global Energy Studies.

"Whether Iraqi oil stays in the ground or is burned above ground, it still doesn't get to the market," he said.

Iraq ranked as the world's seventh largest oil exporter before the war.

EXTRA OUTPUT

OPEC exporters, especially Saudi Arabia, have increased output over the past few months, first to cover a strike in Venezuela and then to cool a price spike fueled by war fears.

Imports of oil in the United States are rising despite the cutoff in Iraqi supplies.

"It is the weight of oil, rather than the force of bombs, which is pushing markets lower," Drollas said. "OPEC is now producing more oil than has been lost."

U.S. Energy Secretary Spencer Abraham said OPEC output was now in line with its total level last November despite shortfalls from Iraq, Venezuela and Nigeria.

Western oil companies operating in Nigeria have slashed production and are expected to close a key export terminal this weekend because of political unrest.

Brokers said investors were selling positions built up on futures markets when U.S. crude rallied to a 12-year peak close to $40 in late February.

"The market has now moved from a war premium to a victory discount," said independent oil analyst Simon Games-Thomas.

OPEC ROW

Price hawks in OPEC are already concerned about the slump, which is good news for world economic growth, but hits revenue for the cartel of mostly Middle Eastern countries.

The dive has also revealed deep splits in the 11-member Organization of the Petroleum Exporting Countries.

OPEC Secretary-General Alvaro Silva said Thursday that members have been authorized to use spare output capacity if necessary to make up a shortfall in Iraq supply.

But Iranian Oil Ministry Adviser Hossein Kazempour Ardebili said any output hike would be a "violation" since no decision had been taken to raise OPEC quota limits.

He said extra oil would be a "green light" to the United States to launch an attack on one of OPEC's founding members.

Saudi Arabia, the world's top exporter and a key U.S. ally, is pumping more than 1 million bpd above its quota of 8 million bpd, according independent estimates.

So far Gulf states near Iraq have reported no disruptions to oil production, nor any disturbances to tanker movements in the Gulf, which is the artery for 40 percent of world oil exports.

An oil refinery depot in southwestern Iran close to the border with Iraq was hit by a rocket on Friday, Iranian government sources said. It was not clear where the rocket, which hit the depot in the city of Abadan, had come from.

Iraq's neighbor, Kuwait, said it cut throughput at its refineries as a precautionary move after a near miss by two Iraqi missiles Thursday.

Iraq: Short War Points To No Increase In Oil Prices

www.rferl.org By Michael Lelyveld

U.S. and international energy agencies are signaling they will not release oil from strategic petroleum reserves, despite reports that some tankers are refusing to enter the Persian Gulf. As consuming and producing nations watch anxiously, prices have continued to drift below prewar levels on assumptions that the war will be short.

Washington, 21 March 2003 (RFE/RL) -- World oil prices nervously followed the news of war in Iraq as major nations signaled that there was no need to tap their strategic petroleum reserves.

In the early hours of hostilities, oil markets continued to ease back from their prewar price highs on assurances that supplies were sufficient to cover the loss of Iraqi production for a month or more.

The cooling trend was evident early on 18 March, when prices slipped to three-month lows on reports that the Organization of Petroleum Exporting Countries (OPEC) had suspended its quotas, leaving members free to pump as much as needed to offset any shortfall. In London, North Sea Brent crude traded as low as $25.53 a barrel, marking the second day below $30, the AP reported. Before the war, some experts warned that prices could top $60 a barrel.

In coordinated statements, the Paris-based International Energy Agency (IEA) and the U.S. Department of Energy praised the OPEC steps to keep the market on track. U.S. Energy Secretary Spencer Abraham called world energy supplies "more than adequate," even if Iraqi forces sabotage the country's oil wells. The statement was seen as a sign that the United States saw no immediate reason to release oil from its 599-million-barrel Strategic Petroleum Reserve.

The 26 nations of the IEA hold emergency stocks of 1.2 billion barrels. In an RFE/RL interview, IEA spokesman Pierre Lefevre says the amount is enough to cover 115 days of global imports.

While the reserves are meant to give assurance, so is the decision to keep them in reserve. The IEA's Lefevre says his organization's position "is to recommend a release only in case of a real physical supply disruption and if we consider that the producing countries are not in a position to cover a shortfall." A spokesman for Abraham declined to go beyond the department's prepared statement.

Producing countries like Russia, which depends heavily on oil prices, are watching developments as closely as consuming nations like the United States. If Western nations feel forced to release reserves, the drop in prices could be dramatic, threatening budget trouble for Moscow if the effect is prolonged.

But the market also showed how suddenly it can turn around. After the U.S.-based Fox News network broadcast a report that several Iraqi oil wells were on fire, world oil prices shot up by 50 cents a barrel. In a White House press briefing, spokesman Ari Fleischer said the extent of the damage was "not ascertainable at this time." Traders seemed to be ignoring the earlier statements by analysts that the loss of Iraqi oil had already been "priced in."

Under IEA treaties, individual member nations may release oil stored in excess of a mandated 90-day supply without a coordinated action, Lefevre says. Opinions about the need for a release have been mixed. Some U.S. consumer groups have called for a limited release to provide economic relief, but officials have insisted that emergency stocks should not be used to manage prices.

"The New York Times" also is raising a warning about a possible supply disruption. It reports that some shipping companies were refusing to send tankers into the Persian Gulf because of the risk, even though there have been no attacks yet.

But in an interview, Edward Morse, a former State Department official, now executive adviser at Hess Energy Trading Company in New York, said the reports of tanker problems were still "anecdotal" and that, in any case, such a disruption would not be felt in world supplies for at least 45 days. Morse said of the tanker concern, "I'm not convinced that it's going to last more than two days."

Many countries have already stepped up their imports. In Japan, for example, Industry Minister Takeo Hiranuma said 71 oil tankers were already on the water, bringing 24 days' worth of imports, the Chinese news agency Xinhua reports.

Morse said it appeared that strategic stocks would not be used. One reason is that the war coincides with a buildup in world production to offset earlier output losses in Venezuela, which is now recovering. The end of the winter heating season in the United States also means a drop in demand.

But Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington, is voicing new doubts about reports that prices should moderate because of Saudi Arabia's announcement that it had stored an extra 50 million barrels of oil for emergencies.

Ebel says, "People keep telling me there's plenty of oil out there, and I say, where is it?" He adds, "How do you get it from these storage tanks to the markets, if tanker owners are reluctant to come into port?"

While Venezuela's recovery and spring weather are factors, lower prices have also relied on assumptions that this will be a short war.

Whichever way the market goes, it seems clear the war has the potential to create huge, sudden price swings with global economic results.

Ebel says that if any release of strategic reserves becomes necessary, it will have to be coordinated closely with OPEC and particularly Saudi Arabia to avoid a destabilizing price plunge.

www.forbes.com Reuters, 03.21.03, 1:14 PM ET

NEW YORK, March 21 (Reuters) - NYMEX crude oil futures slumped to their lowest level in nearly four months midday on Friday as the United States launched a major air war against Iraq and U.S. and British ground forces penetrated deep into Iraqi territory. An early impetus to the day's price decline, the seventh in a row, was news that U.S. and British forces had seized control of key oil producing areas in southern Iraq, increasing prospects of a shorter interruption of Iraqi oil exports. News midday that Royal Dutch/Shell <RD.AS> <SHEL.L> had declared force majeure for up to 14 days on up to one million barrels per day (bpd) of Nigerian crude oil exports due to ethnic violence limited the midday slippage, traders said. NYMEX May crude, the new front month, fell as much as $1.77 or 6.3 percent to $26.30 a barrel, the lowest since November 26. In London, May crude was down $1.35 or 5.5 percent at $24.15 a barrel, moving down with NYMEX crude. A U.S. official, who asked not to be named, said the United States had began major air strikes against Iraq. He spoke as bombs and missiles rained on Baghdad for the third successive night in a war to dislodge President Saddam Hussein from power. Earlier, British Defense Chief Sir Michael Boyce said all key components of the sourthern Iraqi oilfields, which pump half the country's output, had been safely secured. Only seven oil wellheads had been torched in the south, less than the 30 previously reported, although oil-filled trenches were also ablaze, he said. British Defense Minister Geoff Hoon said allied forces also secured Faw, a strategic port linking pipelines to Iraq's main Gulf export terminal Mina al-Bakr. Briefing U.S. congressional leaders, U.S. President George W. Bush said on Friday that "we're making progress" in the war on Iraq, though White House officials cautioned that U.S.-led forces still faced many risks. As armored columns raced toward Baghdad, U.S. forces ran into resistance from Iraqi troops near Nassiriya on the Euphrates river, about 235 miles (375 kms) southeast of Baghdad, which halted their advance on Friday, according to news reporters embedded with the troops. One murky issue, oil traders said, was whether Iraqi Saddam survived a missile attack that targeted him and other Iraqi leaders in a compound that began the war on Wednesday night. Iraq said he did survive but there were reports that he might at least have been injured. ABC News said Saddam was seen being carried out of the rubble on a hospital stretcher wearing an oxygen mask. Analysts at Energy Security Analysis Inc. (ESAI) in Massachusetts said they expected the general price downtrend to continue, with room for periodic price spikes, should there be widespread torching of Iraqi oilfields or if conflict spreads to Kuwait, among a number of possible developments. Traders said a quick end to the conflict would hasten the return of Iraq's sizable exports to the market, creating the possibility of a market awash in oil. This is a distinct possibility, they said, as OPEC, led by powerhouse Saudi Arabia, has been ratcheting production up in the past months to cover any likely interruption of Iraqi exports. The cartel members also raised oil flow to plug shortfalls caused by a long strike in major producer Venezuela, also an OPEC member. Falling in line with NYMEX crude, NYMEX April heating oil futures were down 4.34 cents at 78.10 cents a gallon while NYMEX April gasoline futures were down 5.99 cents at 85.00 cents a gallon.

sg.biz.yahoo.com Saturday March 22, 1:31 AM By Masood Farivar OF DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--U.S. crude oil prices stretched their losses Friday, falling to a new three-month low as the U.S.-led coalition seemed to be making rapid progress against the Iraqi regime.

Admiral Michael Boyce, chief of the British defense staff, confirmed that allied forces had secured all key components of the oil fields in southern Iraq, including the strategic port in the southern Iraqi city of Umm Qasr and the nearby al-Faw peninsula - Iraq's access point to the Persian Gulf and the site of major oil facilities. Only seven wells had been set ablaze by Iraqi forces, not the original estimate of 30, Boyce said.

"This alleviates fears that there would be wide-scale destruction of the oil wells in Iraq," said Peter Beutel, an analyst at Cameron Hanover. "It is going to put additional selling pressure on the market."

About 60% of Iraq's oil production comes from the rich fields near the southern city of Basrah, and about half of the country's U.N.-sanctioned oil exports flow through the Persian Gulf port of Mina al-Bakr.

Iraq's 1.7 million barrels a day in exports have effectively stopped, though oil from the country's northern fields continues to flow through a pipeline to the Turkish port of Ceyhan. The seizure of the southern oil fields raised hopes that Iraqi oil there could start flowing again shortly, analysts said.

Northern Fields Said Contested

May light, sweet crude oil futures fell as much as $1.42 at the New York Mercantile Exchange to a low of $26.70 a barrel, the lowest price for a contract nearest to expiration since Dec. 4. May Brent blend futures fell as much as $1.10 to a low of $24.40.

A sustained drop in oil prices would be welcome news for the U.S. economy, which has been struggling to mount a recovery while burdened with high energy costs, and U.S. consumers, who are paying record prices for gasoline.

Control of oil fields in Northern Iraq was still being contested. ABC News reported that U.S. forces were still conducting air strikes near the northern city of Kirkuk and that there were several fires burning in the area.

Oil prices rallied briefly in New York and London Thursday on reports that some oil wells in southern Iraq were on fire, raising concerns about long-term damage to Iraq's production capabilities.

But such concerns have been swamped by expectations that the war won't greatly affect oil output or transport in the Persian Gulf. A lack of wider disruptions could cause the market to get flooded with extra oil pumped by producers to head off a supply shortage, traders fear.

"World energy supplies are more than adequate to compensate for any disruption these acts may cause," White House spokesman Ari Fleischer said Thursday.

Nymex crude oil futures, after soaring to nearly $40 a barrel ahead of the war, have dropped 28% in the past seven trading days in what more or less has been a replay of the first Persian Gulf War. Then, oil prices fell by a third on the day after the air attack began.

The price decline has come as officials in both producing and consuming countries reassured the market that they won't allow supply shortages to develop.

Supply Disruptions Minimal

In a departure from the events of the Persian Gulf War in 1991, however, neither the International Energy Agency, the Paris-based energy watchdog for the West, nor the U.S. has ordered the release of crude oil from their strategic reserves, saying supply disruptions haven't been sufficient to warrant the step.

U.S. Energy Secretary Spencer Abraham said Friday that global oil production has remained steady despite the loss of Iraqi and some Venezuelan output.

Analysts said such comments helped assuage fears that a war in Iraq - which produces 3% of the world's oil - could create severe supply shortages.

"Assuming that everything goes well, the fundamentals look fairly bearish," said Aaron Brady, an analyst at Energy Security Analysis Inc. in Wakefield, Mass. "OPEC is pumping at a high rate, Venezuela is back, and even if Iraqi oil is cut off for some period of time, it is manageable."

The possibility of further prices declines is of concern to OPEC members, who have already begun to talk about the need to cut output to head off a plunge in prices.

"If prices go through the floor, we will decide about cutting production in the same way that we put oil in the market when prices go through the roof," OPEC Secretary-General Alvero Silva said.

-By Masood Farivar, Dow Jones Newswires; 201-938-2094; masood.farivar@downones.com