www.startribune.com Bob von Sternberg, Star Tribune Published Mar. 4, 2003 OIL04    As the United States draws ever closer to another war against Iraq, the role of oil in that struggle has come under increased scrutiny.

While antiwar activists boil their argument down to a chant of "no war for oil," the more hawkish advocates of war have gone so far as to say Iraq's vast oil wealth could be used to pay the costs of occupying the country.

Depending on the course of the fighting, its effect on U.S. consumers and the world's economy could be anything from trifling to catastrophic.

Start with the immediate economic effects when the bombs start dropping: If the experience of the 1991 Gulf War and the assessment of most oil industry analysts are any guide, the fallout should be relatively modest.

Iraq's invasion of Kuwait and the subsequent war spawned widespread fear that the world would plunge into an energy crisis. It never happened.

Demonstration of oil well firefighting techniques

Sue Ogrocki Associated Press

Immediately after Iraqi troops stormed into Kuwait, the price of oil shot up to about $40 a barrel. As soon as it was obvious that the war would be short and decisive, the price fell back below $20 a barrel. Other oil-producing nations had stepped into the breach.

This time around, jitters about war and the recent political chaos in oil-rich Venezuela have kept oil prices relatively high. Last week, prices reached their highest levels since the '91 Gulf War, briefly approaching $40 a barrel.

'Short-lived'

Although Iraq's oil reserves are second only to Saudi Arabia's, the effect of a war on the world's oil markets is likely to be even less than the the first Gulf War. Pumping only about 2 million barrels a day, its production represents a mere 2 percent of worldwide production.

"If the issue were simply the likely loss of Iraqi exports, most experts would agree that the market impact of military action would be manageable and short-lived," concluded a recent report by the Petroleum Industry Research Foundation in New York.

However, the report warned: "It should be kept in mind that while the U.S. may decide the timing of military action, the consequences for the region, and the ultimate impact on oil, remain unknown."

The impact depends on how quickly a war ends and whether Saddam Hussein's forces torch their oil fields as they did Kuwait's 12 years ago.

On Feb. 7, Iraq's ambassador to Russia, Abbas Khalaf, said his countrymen "will not blow up the oil fields in the event of strikes on its territory." Khalaf also told the ITAR-TASS news agency: "Oil is our national wealth."

Even so, Pentagon planners have spent long hours on a strategy for protecting the oil fields. The options reportedly range from dispatching special operations forces into Iraq's oil fields during the early fighting to using electronic jamming equipment to hinder a coordinated destruction of wells.

The Center for Strategic and International Studies recently analyzed likely scenarios.

If war is avoided, oil prices will quickly collapse worldwide, reaching a low of $16 a barrel late next year, the center predicted. A war that ends within weeks, with few casualties and no damage to Iraq's oil industry would cause a brief spike in prices into the $30 range, tailing off to about $20 a barrel at the end of 2004. In the worst case -- a protracted war in which weapons of mass destruction are employed -- the price would skyrocket to $80 shortly after the fighting begins, remaining above $60 throughout 2003 and falling only to $40 a barrel in 2004.

Such price increases could ripple catastrophically through the world's economy. The International Monetary Fund has a rule of thumb that for each $5-per-barrel annual increase in the price of oil, the world's gross domestic product drops 0.25 percent. A sustained oil price of $60 would knock a full 1.5 percent off the world GDP.

Unlike in 1990, when Iraq's invasion of Kuwait caught the oil industry by surprise, the Bush administration has given the industry ample time to prepare. The International Energy Agency has announced that its 26 member countries are holding 4 billion barrels of oil in reserve, equal to 114 days' worth of imports by the United States and other importing countries.

Agency officials say this war will not be a repeat of 1990, when months passed before it released stocks. This time, they have promised to act within hours of the start of fighting.

The United States has its own ace in the hole -- oil stored in the Strategic Petroleum Reserve, located in the Mississippi Gulf Coast's underground salt domes. Oil has been released from the reserve only once, when the first President Bush ordered the release the day the bombing started in 1991. His son has pledged to do the same.

The reserve holds about 550 million barrels, enough to supply the entire U.S. market for less than 29 days.

Perhaps the most vexing question about Iraq's oil is how it will be controlled once the war is over.

A U.S. task force is conferring with energy experts, industry executives and Iraqi opposition leaders on how to revive and expand Iraq's multibillion-dollar oil empire once Saddam is toppled. Bush administration officials consider revenue from oil exports essential to rebuilding the country once the fighting stops.

Those officials also are loath to say much publicly about Iraq's oil, lest they stoke criticism that a war with Saddam is as much about oil as it is about terrorism.

After reports surfaced in January that some administration officials were pushing for de facto U.S. control of Iraq's oil industry, Secretary of State Colin Powell was quick to quash the notion.

"The oil of Iraq belongs to the Iraqi people," Powell said during a Jan. 21 press conference. "It will not be exploited for the United States' own purpose."

Edward Djerejian, director of the James A. Baker Institute for Public Policy at Rice University, co-authored a recent report with the Council on Foreign Relations that analyzed a post-Saddam Iraq. The report urged that the Iraqis be allowed to retain control of their oil.

"One of the most important issues to address is the widely held view that the campaign against Iraq is driven by an American wish to 'steal' or at least control Iraqi oil," the report concluded. "U.S. statements and behavior must refute this."

Massive investment

Robert Ebel, one of the authors of the report by the Center for Strategic and International Studies, said it's impossible to predict Iraq's future oil production because "we don't know what kind of Iraq we're going to have in the morning after."

It is certain, though, that "there will be a massive investment program to get the Iraqi oil industry first back on its feet and then to top it off with expansion," he said.

The ultimate cost could reach $40 billion, according to Djerejian's report. Energy service companies such as Halliburton and Bechtel, which oversaw the repair of Kuwait's oil fields, could earn billions of dollars in deals to upgrade wells, pipes, pumping stations and export terminals in Iraq.

And the world's oil giants -- such as Exxon Mobil Corp., ChevronTexaco and Russia's Lukoil -- are looking for a chance to negotiate lucrative development deals with Iraq.

The fact that many of these companies have close ties to top Bush administration officials -- including Vice President Dick Cheney, who once ran Halliburton, and the president himself -- has fueled speculation among some critics that an attack on Iraq is mostly about oil. The administration strongly denies any such intent.

Also unanswered is how a cash-starved Iraq, under pressure to pump as much oil as possible, will deal with OPEC's strategy of limiting production to keep prices steady. The Saudis and other members of the Organization of Petroleum Exporting Countries (OPEC) are unlikely to allow Iraq to overproduce, which would drive down world oil prices.

The Middle East Economic Survey, a weekly oil newsletter published in Cyprus, recently reported that OPEC members are considering the prospect of a U.S. occupation of Iraq that would lead to the United States, in effect, sitting in as a temporary member of the cartel.

"If it is clearly in Iraq's interest to remain in OPEC, then the intriguing prospect must arise of the U.S. representing it during the occupation period," the newsletter said.

The Associated Press contributed to this report.-- Bob von Sternberg is at vonste@startribune.com.

business-times.asia1.com.sg By VEN SREENIVASAN

SINGAPORE - Keppel Corp was the star performer in an otherwise lethargic market today, as investors warily watched the latest twists and turns in the unfolding Iraq drama.

The stock of the marine conglomerate shot to $4.43 before closing a net 14 cents lower at $4.28 ¡Âú its highest level since mid-November 2002 ¡Âú as players focused on companies that promise stability, growth, value and yield amid increasing geopolitical and economic uncertainty.

Keppel Corp's stock has gained more than 10 per cent in the past three sessions.

The Straits Times Index kicked off this week on a bright note, hitting 1,291.75 before late profit-taking pared it to a close of 1,279.2 ¡Âú a net gain of 5.35 points.

But despite the positive top-line indicator, the broad market was less than effervescent.

Volume was modest, with about 333 million Singapore dollar-denominated units worth some $229 million changing hands as gainers led losers 129-82 and 348 counters closed unchanged or weren't traded.

Venture Corp, which once more has delivered in terms of earnings, was the top gainer, rising 50 cents to $13.90. Last week, the contract manufacturer delighted investors by posting a stronger-than-expected 35 jump in net earnings to $181 million on a 65 per cent rise in revenue to $2.4 billion.

Not surprisingly, Venture's proven ability to do well despite tough conditions has prompted a slew of ""out-perform'' calls on its stock, with fair value ranging from $16 to $18.

Other notable blue chip gainers today included Singapore Airlines, which added 15 cents to $9.60, and Creative Technology, which was up 20 cents to $11.20.

The stock of Neptune Orient Lines eked out a 1.5-cent gain to 90.5 cents after the company announced that it has won a seven-year contract worth US$220 million to transport fuel from Venezuela to Singapore. But the deal will not help NOL's earnings in the current financial year.

Among small caps, Citiraya was in the limelight.

The stock of the electronic components recycling specialist topped the actives list with almost 22 million units changing hands as it gained 3.5 cents to 54.5 cents on speculation that the strong gold price will boost the firm's bottom line. Gold is a by-product of Citiraya's recycling activity.

Surface Mount Technology (SMT) was also actively traded, following a visit by analysts to its China operation. The stock edged up a cent to 52.5 cents as some 3.7 million units changed hands.

Research house Kim Eng sounded an upbeat note on SMT after visiting the company's Dongguan plant. In an on-line report, the local broker said SMT is poised for strong growth: ""All factories remain fully utilised ¡Âú even the four newly added lines over the past six months,'' Kim Eng said. ""It appears that the group's production ramp is on track to make another record year.''

Going forward, geopolitical concerns are likely to continue to dictate sentiment and the direction of equity markets.

Indeed, rises in Japan, Hong Kong, Taiwan and Sydney today were largely seen as a reaction to a perceived fall in the risk of war in Iraq.

Baghdad's decision to dismantle its Al-samoud missiles, Turkey's refusal to host US ground troops for an invasion, calls by some Arab nations for Saddam Hussein to step down and strident opposition to US-led military action by France and other United Nations Security Council members are seen as key factors weighing against an attack on Iraq for the time being.

But all this could change come Friday, when UN Chief Weapons Inspector Hans Blix reports to the Security Council.

In the meantime, the market is expected to gyrate between hope and fear.

Analysts expect the ST index to remain largely range-bound between resistance at 1,280-1,290 and support at 1,260-1,270 as the focus remains largely on short-term situational plays.

www.pittsburghlive.com By Gregory M. Drahuschak FOR THE TRIBUNE-REVIEW Sunday, March 2, 2003

Investment commentaries lately have focused on two points, Iraq and the limp-along pace of the United States economy. But while the U.S. frets over its economic growth and numerous political uncertainties, one nation is moving full steam ahead economically, which, depending upon how you assess the politics involved, could either be very good or very bad for U.S. investors.

China's economy is booming. Imports are up 21.2 percent year-over-year, and the government is targeting 7-8 percent real Gross Domestic Product growth for 2003. The nation's trade posture is strong, also, with a current-account surplus of 2.2 percent of its GDP.

China quickly is becoming a force in nearly every basic industry, either as a maker or user. China accounts for 14 percent to 25 percent of the global steel demand and 20 percent of production. Aluminum production in China has grown 13 percent a year since 1990 and made the nation a net exporter of aluminum. China represents 12 percent of global commodity chemical demand and 11 percent of global consumption. It has been estimated that Chinese demand for plastics could rise 10 percent or more each year for the foreseeable future.

But this growth does not come worry free. As with any industrialized nation, energy availability is a crucial issue. It is notable to recognize that until 1995, China was a net exporter of oil. In 2001, it imported more than 60 million tons. It has been estimated that China's need for imported oil will at least double over the next decade.

China may now be another example of the old cliché that warns to be careful about what you wish for because your wish might come true. As long as 20 years ago, a widely voiced hope was that China's vast economic growth potential could be realized. Now that this is moving closer to reality, the offshoot of this growth could complicate economic life significantly everywhere else.

So where does China plan to get all the imported oil it needs? Where else but the same places everyone else gets it: primarily, the Middle East.

A comment from OPEC last week should have sobered those who believe a halt to Mideast tensions automatically will drop the price of oil and allow the oil tap to run wide open. An article in the Wall Street Journal suggested that OPEC no longer can control the upside in prices and that there is not much more room to increase production.

Knowing that the engine for its growth will be fueled by energy availability, China has been trying to cut delivery deals with many nations and reportedly has done so already with Sudan, Venezuela, Iraq and Kazakhstan. Arms deals with the Saudis appear to have an energy connection to them, also.

Just shy of 30 years ago, the U.S. got what should have been a huge wake up call when OPEC cut production and placed an embargo on shipments of crude oil to Western countries. Six years later, a revolution in Iran prompted another pricing and supply jolt.

Despite what might be termed Johnson & Johnson Band-Aid attempts at resolving the problems — like coal gasification projects, windmills and other energy alternatives — we essentially did little to extricate ourselves from the shackles that bound us to imported energy. And we now are paying a literal price again for our lackadaisical approach to the problem, and that's before China is considered.

China's growth finally may offer investment opportunities, but China also may have provided us with another reason to seek energy alternatives that would not only remove our energy shackles, but also could remove the Middle East as a political issue.

The question now is one of resolve. Finding economically viable energy alternatives will not come easily or cheaply.

In 1960, President Kennedy set out to land a man on the moon and was chided soundly supposedly for wasting money on something that would benefit nearly no one. The benefits today, however, are abundantly evident in the billions of dollars of GDP related to technology. Without the demands of the space program, development of computers as we know them might have been delayed years beyond the current time.

Today, an all-out alternative energy search likewise might be expensive, but it not only might allow us to achieve our objective, it also could have a multitude of spin-off benefits — not the least of which is not having to listen to the droning comments in the news about world political events and a slumping equity market.

Gregory M. Drahuschak is first vice president of Janney Montgomery Scott Inc., Pittsburgh.

cgi.citizen-times.com By Asheville Citizen-Times March 1, 2003 6:04 p.m.

On paper, the plan looks good. Overthrow Saddam Hussein and allow democracy to bloom in Iraq and spread to the Muslim world.

If it works, the result will mean less oppression, more freedom and a much safer world. Thus, a much safer America. The size of that "if'' is gargantuan.

It's hard to overstate the number of eggs currently in the Iraq basket. The economy hinges on Iraq. The 2004 elections hinge on Iraq. The future of the United Nations and NATO are being shaped by Iraq.

To put the situation in terms of a poker game, President Bush has taken a solid but not spectacular hand - that Saddam Hussein is a brutal and dangerous leader who should be ousted - and is betting on it like it's a royal flush. The result is seriously frayed relations with the U.N. and NATO and a series of world hot spots from Venezuela to North Korea that aren't receiving the attention they deserve because of the single-minded focus on Saddam. Saddam was in a box.

We've crawled in with him.

The box is getting more uncomfortable by the day, as estimates of the cost of the war (now around $100 billion, not including billions to Turkey and the like) and the size of a U.S. occupation force (hundreds of thousands of troops) and the length of the mission (no end in sight) grow.

And this is the optimistic view.

On paper, Bush's vision of the outcome of the "battle for the future of the Muslim world'' foresees a region that is fundamentally changed to the favor of the U.S. The reality is far less clear-cut. A short comment from Youssef Ibrahim of the Council on Foreign Relations to the Washington Post frames that reality well: "I think Arabs almost without exception would welcome more democracy and more freedom of expression and to be liberated from the police states they all - in one form or another - live under. It does not follow that they would trust America to do this for them. The view over there is totally different from the view expressed here."

Indeed, the views expressed on these shores aren't exactly in lockstep. And that's not surprising, given the administration's continual raising of the stakes.

With the latest raise, we have rather casually gone from fighting terrorists to taking out Saddam with a pre-emptive strike and now to changing the face of the entire Middle East.

The president outlined this vision in a speech Wednesday at the American Enterprise Institute, a conservative think tank. It was probably the most inviting comfort zone possible for such a speech. But to his credit, unlike his father, the president has a vision for what happens after the war. If the first President Bush had had such a vision, we wouldn't be where we are now. But this plan goes beyond think tanks and far beyond comfort zones. It is a grand and wonderful vision. And it's worth remembering that the vision of a freer world should always be the vision of an American president and the American people.

Beyond vision is the matter of strategy, of how to get from Point A to Point B and on down the road. The president is looking at Point Z. A lot of cards are going to have to fall in our favor.

Even if things go perfectly, however, it sets a very hard road for this nation. Are we ready to see our sons and daughters deployed for years on end in foreign lands? Are we ready to pay the financial price, which almost certainly will be steeper than predicted? Are we ready to reinstate the draft to provide the manpower needed to fuel such a venture, if needed? Is this vision worth creating huge rifts with allies across the globe?

There is something of a sense that we are a nation at a precipice.

Are we sleepwalking right over that precipice?

Taking that step may be a wise move. It may not be. There's a lot that can go right with this grand vision. There's a lot - probably more - that can go wrong.

We're about to find out.

The last cards are being played.

www.barnstablepatriot.com By Edward F. Maroney

WAR CLOUDS FORECAST Maureen Kelliher, senior vice president of Citizens Bank, told Cape Cod Chamber of Commerce members Wednesday that the duration of a possible war with Iraq will determine the health of the American economy.

Wondering if the U.S. will take on Saddam Hussein in the next few weeks? Look to the oil strike in South America for the answer.

"My sense is that we cannot go to war until Venezuela comes back on line," said Maureen Kelliher, senior vice president of Citizens Bank, in an address to the Cape Cod Chamber of Commerce Wednesday on the economic outlook for 2003.

Drawing on the analysis of economists at the Royal Bank of Scotland, which owns Citizens, Kelliher said hopes for a full recovery from the recession ride on the duration of a potential war with Iraq.

One factor in determining the health of a country's economy is the status of its gross domestic product, or GDP. Kelliher tied that statistic to the price of oil.

"Every dollar above $26 per barrel drains $5 billion from the GDP," she said, adding that the price is fluctuating between $34 and $37.

Kelliher said there are three scenarios the American economy can follows in 2003. One envisions not going to war or staging a quick and successful campaign in Iraq. "If the conflict subsides quickly, the economy will return to growth in the second quarter," the banker said.

If the price of oil remains high (one of the "economic headwinds" she cited), Kelliher predicted a "flat to slightly positive GDP."

The third scenario envisions a prolonged war in Iraq with a concomitant loss of consumer confidence in the U.S. and a sharp climb in oil prices resulting in what Kelliher called "a double-dip recession."

Consumer spending has been the engine keeping the economy inching forward, according to the banker, who noted that the latest surveys find a decline in consumer confidence. She said the economy grew 2.8 percent last year in spite of big stories about corporate malfeasance and high-profile bankruptcies coupled with geopolitical jitters.

One saving grace, she noted, was that the cheating and failures of some companies "didn't have a lot of domino effect" on the rest of the economy.

The "truly robust housing market" continues to help, Kelliher said. She said she expects remortgaging activity to continue at its fast pace in 2003. "There's a lot of pent-up opportunity for the consumer to reduce his costs and strengthen his balance sheet," she said.

Asked whether technology stocks will rebound, Kelliher said corporate expenditures preparing for the Year 2000 computer conversions pushed up the value of such companies. "The problem," she said, "was that there was no Y2K (disaster)." Nevertheless, she expects a "small echo boom" as companies prepare to replace outdated information technology.

Chamber Offers Look at Fourth Quarter

The Chamber used the occasion to issue its fourth quarter economic update, which showed a 6 percent increase in state and local room tax revenue over the last three months of 2001.

A statistic based on use of one (unnamed) major credit card showed a 13 percent increase in credit charges, with the greatest jump coming in fuel products. Total transactions with the card in department stores were off 3 percent.

The number of single-family homes sold increased 5 percent over the same quarter in 2001, but the average sales price jumped 25 percent, from $275,845 to $344,497.

Visits to the Chamber's visitor centers and to Cape Cod National Seashore areas increased 4 percent.

Wendy Northcross, the Chamber's CEO, said Citizens Bank will sponsor the quarterly economic update this year.