reuters.com Mon March 17, 2003 10:43 AM ET By Richard Valdmanis

NEW YORK (Reuters) - Time is running out for extra oil supplies expected from the OPEC cartel to hit U.S. shores and allow the world's biggest fuel consumer to smoothly build gasoline supplies ahead of the summer driving season.

The situation could mark a large problem for the United States, leaving it more dependent on imports than ever at a time when the White House pushes to the brink of war on Iraq and retail gasoline prices hit all-time highs, threatening an economic recovery.

"The U.S. needs large slugs of extra oil to cope with the increase in (refinery) runs, stop the erosion of inventories and to begin to claw back some cover," JP Morgan said in a research note. "The U.S. oil market is undersupplied."

U.S. oil stockpiles have fallen below 270 million barrels, the government's suggested level for seamless operations, as supply disruptions from Venezuela and an unusually long, cold winter drained supplies.

The resulting low oil inventories, near the lowest level since 1975, will prove a problem for U.S. fuel suppliers, who tend to use the brief respite in consumer demand in the second quarter to refine more crude oil and build fuel stocks ahead of higher summer gasoline demand.

"The main problem is that while global oil demand does indeed hit a minimum in (the second quarter), U.S. crude oil runs increase," said JP Morgan, meaning deeper declines in crude supply are likely if imports don't shoot higher.

The U.S. second-quarter increase in crude oil demand averaged roughly 1 million barrels per day in 2001 and 2002, and is expected to be even sharper this year as the industry struggles to buffer paper-thin inventories -- requiring a strong increase in imports.

"There's potential for trouble," said Tim Evans, senior analyst at IFR-Pegasus. "Low crude inventories limit the extent to which higher refinery rates can be sustained. But the cavalry rising up over the hillside is represented by OPEC, which has already started pumping away."

OPEC, which accounts for 60 percent of world oil exports, has signaled it will defend against global short supply by upping shipment volumes even as the group declines to lift its official production curbs due to worries over overall weakness in global demand.

OPEC powerhouse Saudi Arabia has already raised production sharply in the first two months of this year to make up for lost Venezuelan supply. Tanker brokers said on Friday the kingdom snapped up 14 tankers to move 29.5 million barrels of crude oil to the U.S. Gulf for May delivery.

So far, the increased production has yet to translate into higher U.S. crude stockpiles.

And, while Saudi Arabia has reassured the market it will continue to pump more oil in the event of a war, there are doubts whether Riyadh has enough spare capacity to compensate fully for disruptions from Iraq, which has a sustainable export capacity of 2.2 million bpd.

The International Energy Agency in a monthly report on the oil market outlook released on Wednesday estimated that OPEC in total has only 900,000 bpd to spare, with 400,000 bpd in Saudi.

If crude supplies become scarce enough to hinder the U.S. oil industry's attempt to build up gasoline supplies before summer, pump prices are likely to continue to surge, pushing through record levels.

The average retail price of gasoline in the United States on Saturday was $1.719 a gallon, a new all-time high, according to the American Automobile Association's latest survey.

The inventory situation in the U.S. has worried the White House enough to consider the use of a release of the nation's Strategic Petroleum Reserve -- a move reserved for only the most dire of supply crunches.

U.S. Energy Secretary Spencer Abraham said on Friday Washington reserved the right to make a unilateral release of crude from the emergency reserve in the event of a severe supply disruption. The statement came after a similar comment from Japan, which said it would tap its reserve if Iraq is invaded by U.S.-led forces.

reuters.com Mon March 17, 2003 10:22 AM ET

WASHINGTON (Reuters) - The chairman of the House Energy and Commerce Committee said on Monday that the Energy Department has told him that the Strategic Petroleum Reserve is ready to release oil to counter a disruption in supplies.

"Our review with the Department of Energy has convinced me that the SPR is fully operational and capable of releasing crude oil within the parameters required to prevent interruptions in crude oil deliveries to the market," Republican Rep. Billy Tauzin said in a letter to fellow lawmakers.

"The SPR has, for some time now, transitioned from the 'fill' mode to the 'flow' mode and is prepared to flow upon orders from the President," Tauzin said.

With a possible war with Iraq looming, supply disruptions in Venezuela and skyrocketing oil prices, Tauzin made his comments in a letter to lawmakers urging their support to expand the reserve to 1 billion barrels from its current capacity of 700 million barrels.

www.forbes.com Reuters, 03.17.03, 10:21 AM ET

WASHINGTON (Reuters) - The chairman of the U.S. House Energy and Commerce Committee said on Monday that the Energy Department has told him that the Strategic Petroleum Reserve is ready to release oil to counter a disruption in supplies. But the U.S. Energy Department said the Bush administration has not made a decision to tap the Strategic Petroleum Reserve. The administration is prepared to use the reserve in a supply emergency, an Energy Department spokesman told Reuters. "But at this point we have not made a decision to move on the Strategic Petroleum Reserve," she said. "We are monitoring the situation very carefully," the spokeswoman said. "Our review with the Department of Energy has convinced me that the SPR is fully operational and capable of releasing crude oil within the parameters required to prevent interruptions in crude oil deliveries to the market," Republican Rep. Billy Tauzin said in a letter to fellow lawmakers. "The SPR has, for some time now, transitioned from the 'fill' mode to the 'flow' mode and is prepared to flow upon orders from the President," Tauzin said. With a possible war with Iraq looming, supply disruptions in Venezuela and skyrocketing oil prices, Tauzin made his comments in a letter to lawmakers urging their support to expand the reserve to 1 billion barrels from its current capacity of 700 million barrels.

smartmoney.com March 17, 2003

Oil prices are sliding as more crude moves toward a thirsty U.S. market, but gasoline prices aren't expected to follow them down anytime soon, Monday's Wall Street Journal reported.

The reason: tight crude-oil supplies and production problems, particularly on the West Coast.

In California, where prices now average $2.08 a gallon, gasoline supply continues to be dogged by refinery- maintenance issues and complications surrounding the production of a new ethanol-gasoline blend. Those problems appear to be affecting supplies to other western states.

Nationally, gasoline prices are expected to reach highs, before adjusting for inflation, when the latest survey comes out today. They most recently averaged $1.71 a gallon of regular, just below the previous record. A prolonged oil workers' strike in Venezuela this year and fears about the impact of a possible U.S. invasion of Iraq have contributed to the bulk of the price run-up.

Inventories have dropped dangerously low in some parts of the country and will be hard to replenish quickly. The crude on the way from the Middle East won't help inventories for a month or more, and weeks more will pass before the oil is refined into gasoline and transported to service stations. The Energy Information Administration, an arm of the Department of Energy, predicts that pump prices will peak at $1.76 this year.

On Friday, crude oil fell on the New York Mercantile Exchange, in part reflecting reports that Saudi Arabia had chartered at least a dozen oil tankers for shipment to the U.S. Gulf Coast. But that oil won't reach U.S. shores until the first half of May. In the meantime, the first wave of extra Saudi oil -- shipped more than a month ago -- is expected to reach the U.S. Gulf Coast soon, said Larry Goldstein, president of Petroleum Research Foundation in New York.

Wall Street Journal Staff Reporter Alexei Barrionuevo contributed to this report.

(END) Dow Jones Newswires

03-17-03 0028ET

www.timesstar.com14861249916,00.html Article Last Updated: Monday, March 17, 2003 - 2:54:13 AM PST By Erin Breznikar, STAFF WRITER

FREMONT -- Filling one car at the pump is bad enough. But when you have hundreds, the costs are unbearable.

As fuel prices rise and hundreds of city vehicles remain on the road, fleet managers in Fremont, Union City and Newark have increased gasoline spending by thousands of dollars.

"We have seen fuel go up easily 50 cents in the past year. ... This does terrible things to my budget," said Union City fleet manager Mike Klinkner, who oversees the city's 175 vehicles.

Union City's fleet consumes 140,000 gallons of diesel and unleaded gasoline annually.

Fuel costs can vary between suppliers by as little as 21/2 cents per gallon. But those small differences add up, Klinkner said.

Wholesale gasoline prices vary according to the published Oil Pricing Information Sheet (OPIS). Cities typically sign a contract for one lump sum, estimating their yearly fuel costs for police, fire, maintenance and other city vehicles.

But as costs increase, cities are forced to make up the additional expense to the petroleum companies. With the dramatic rise in gasoline prices in recent weeks, new expenses are dumped on already cash-strapped budgets.

With 607 vehicles, the city of Fremont uses nearly 250,000 gallons of unleaded fuel and75,000 gallons of diesel each year. "We are certainly concerned that we have enough funding to maintain the fleet," said Tony Vargas, fleet superintendent. "(City departments) are looking at the vehicles they have and determining what's absolutely necessary."

A recent estimate obtained by the city of Newark put unleaded gas prices 30 cents per gallon higher since its last purchase, in February. The price increased nearly 50 cents per gallon since December.

... curtailing trips, carpooling to better utilize the vehicles they have."

In 2002, the city's contract for gas was $311,152, a figure based on annual estimated usage of vehicles -- and about $122,000 higher than the previous contract, in 1998, when fuel was purchased for a slightly smaller fleet.

Fremont's contracts typically are for one year, with three one-year options to extend the purchase, making it impossible to shop around for cheaper pricing and more favorable terms once the contract is signed.

With layoffs and $22 million in budget cuts in store for the city, skyrocketing prices could lead to further reductions.

"We may look at reducing the size of the fleet," Vargas said. "There have been some staffing cuts so we can reduce the number of vehicles required."

According to analysts, increasing fears of war with Iraq and a general strike in Venezuela, which pushed down production, have added to the price increase.

Gas prices have increased faster throughout the Bay Area than in much of the state and nation. The skyrocketing cost of gas is one more thing for cities across the state to worry about as Gov. Gray Davis hands down local funding cuts, according to the League of California Cities, a statewide association for city officials.

"Cities are really concerned about the state budget and are concerned if they are going to lose funds," said Megan Taylor, a spokeswoman for the League of California Cities. "In addition, cities are losing tax revenues from falling hotel and sales tax. The third part of the concern is rising fuel prices."

In the meantime, cities will continue to monitor vehicle use and promote sensible driving.

"It's similar to how we address energy saving, " said Dennis Jones, Newark's Public Works Director, "do all of the little things you can to help add up to try to conserve."