www.mtdemocrat.com By JONATHAN SCHWARZBERG Staff writer

The gas supply right now may be as tight as electricity was during the peak of the electricity crisis in California.

Bill Keese, chairman of the California Energy Commission, told the El Dorado Irrigation District board that during the energy crisis the power from a 21-megawatt power facility like the Akin Powerhouse could have had an effect on the price of electricity.

Things may be the same way with gasoline right now.

"We are so strapped right now that anybody could (affect the market)," Keese said.

Keese likened the current crisis to a kind of "perfect storm" that has been created by a variety of circumstances. The impending war in Iraq has caused oil supply problems from the Middle East. A strike in Venezuela has stopped oil coming from that country.

With tight supplies, the market can become open to manipulation. So Gov. Gray Davis has charged the Energy Commission with investigating the price of gas. Keese said he will present his report to the governor on March 28.

"Is gouging occurring?" Keese asked. "I don't know."

But Keese said the commission is looking to see whether gas prices are fair. He said when supplies are tight it is difficult to determine whether prices are being manipulated.

Another "perfect storm" hit the state of California with a shock about two years ago with the electricity crisis. This storm came to a head in 2001 when rolling blackouts were experienced in El Dorado County and across the state.

In the same way that California is experiencing a lack of gas supply this year, the state faced a lack of electricity. California usually gets electricity during summer from hydroelectric facilities in Washington state and Canada. But when these areas couldn't produce electricity for California, the state was in trouble.

"They had a drought," Keese said. "We had high temperatures. We had power plants out."

California saw a power supply boon in the 1980s with nuclear power plants and hydroelectric facilities being built.

"We built so much in the '80s that we entered the '90s with a big surplus," Keese said.

So California built no major power plants in the 1990s. Basic supply and demand pushed electricity prices from $30 per megawatt hour to about $300 per megawatt hour at the highest. Since that time, California has locked in prices of between $50 and $60 with long-term contracts.

These contracts have leveled things out for now, but Keese said the state needs to build at least two large power plants per year in order to keep up with demand.

But another problem may be looming over the horizon.

All the proposed power plants will run on natural gas. This is the fuel of choice because it is clean-burning, but natural gas supplies are getting tight, too.

California produces only about 10 percent of its natural gas. The rest is imported from other parts of the country. Fortunately, California is at the end of the road for much of the piped natural gas. This means California can store, and does store, a lot of natural gas.

But more natural gas will be necessary. So companies throughout the state are looking for ways to import more gas.

Keese said one of the most promising techniques for bring natural gas in could be LNG, liquid natural gas. It is possible to take trapped natural gas and convert it to a liquid form so it can be transported more easily.

This form of gas can be obtained for about 50 cents per million BTU (British Thermal Units). Transportation costs drive this price up to about $3.80, but that is still less expensive than the $5 price the state faces right now.

California has been forced to pay these high prices due to the hard winter in the Northeast. Some states are paying over $9 per million BTU, taking most of the natural gas from Texas.

"As soon as they're willing to pay $9, it's not going to come here," Keese said.

So the market for natural gas remains unstable, which affects the electricity market. Meanwhile the oil market is bouncing around, and two "perfect storms" travel dangerously close to each other.

Jonathan Schwarzberg can be reached by e-mail at jschwarzberg@mtdemocrat.net.

www.sltrib.com COMBINED NEWS SERVICES

The price of oil plunged 9 percent Tuesday, falling to its lowest level in more than two months as traders bet that the impending U.S. invasion of Iraq will go smoothly and that global stockpiles of crude are sufficient to offset any supply disruptions. 
The April futures contract fell $3.26 to $31.67 a barrel Tuesday on the New York Mercantile Exchange, the lowest close since Jan. 8. 
However, with U.S. supplies low and uncertainty in the Middle East high, traders said petroleum prices probably will remain volatile in the short term. 
"This thing could go right back up," said Tom Bentz, an analyst at BNP Paribas in New York. "We're still vulnerable because inventories are tight." 
Disaster scenarios suggest an economic recession if the war drags on and Iraq's immense oil fields are set on fire, reducing the volume of oil on world energy markets. 
Most forecasts, however, take a milder position. They predict the price of crude oil could surge briefly into the mid-$40s range as war begins. 
Pump prices gradually would fall in a short war, experts say, as long as Iraqi oil still flows and Persian Gulf oil ports stay free of disruptions by terrorists. 
"You'll have a spike in the price over the first couple of days. But if we have Bush's rosy scenario, the price will come down 10 or 15 cents a gallon fairly soon," said Dennis O'Brien, director of the Institute for Energy Economics and Policy at the University of Oklahoma. 
What is more worrisome than $45 per barrel of oil is the prospect of a prolonged war that erodes the confidence of Americans. Consumers have kept the economy rolling for two years, for example, in large part by buying new cars and trucks at a rate of about 16.8 million vehicles annually, keeping automakers busy and autoworkers employed. 
"If it turns into a quagmire in Iraq, it'll play havoc on consumer confidence and business confidence," said economist Bob Schnorbus, an auto-industry analyst in the Detroit office of the research firm J.D. Power and Associates. 
Schnorbus predicts auto sales will rebound and the industry will wind up with respectable sales of 16.4 million vehicles this year. But the forecast assumes a short and successful war. "If that doesn't happen," Schnorbus said, "the risk of going into another recession is real." 
While consumers brace for what may come, they already have seen a rapid rise in gasoline prices since last year, when crude prices dipped to less than $20 a barrel. 
Analysts contend the rise in pump prices has less to do with uncertainty over Iraq than with the weather. "You have a bunch 

www.sfgate.com Sam Zuckerman, Chronicle Economics Writer Wednesday, March 19, 2003

Oil prices plunged around the world Tuesday as traders decided that a U.S. attack on Iraq will succeed quickly and cause little disruption of energy markets.

A day after President Bush issued an ultimatum to Iraqi leader Saddam Hussein, setting the stage for an immediate invasion, a wave of selling gripped the oil market. The price of contracts to deliver crude oil next month fell $3.26 to $31.67 a barrel on the New York Mercantile Exchange, a drop of nearly 10 percent.

Since last Wednesday, the cost of those contracts has fallen 16 percent, reversing much of the big run-up in oil prices that had occurred during the past year as Washington's showdown with Hussein approached.

If it lasts, the sharp drop in oil prices will be a real boon to consumers and help boost lagging economies around the world.

Unleaded gasoline in the Bay Area averaged a record $2.27 per gallon last week, up 71 cents from a year ago. Gas prices won't come down in lockstep with falling crude costs, but the decline will put downward pressure on prices at the pump.

Nationwide, money that's now going to fill tanks and pay heating-oil bills will be freed for spending on other items.

But analysts warned that there are reasons to question whether the drop in oil prices can be sustained. Oil-market participants are betting that U.S. forces will roll over the Iraqis in short order and that oil facilities will suffer little damage. Any deviation from that scenario could send oil prices shooting up.

"Traders are discounting the prospect that war will be a quagmire," said Severin Borenstein, director of the University of California Energy Institute. "They are missing the point of what a war premium really is -- a risk that war could go badly."

What's more, supplies are tight in the energy market even without a conflict, leaving little margin for error. Production by Venezuela, one of the world's leading exporters, has been crippled by internal political conflict. After a cold winter that produced heavy demand for heating oil, inventories of crude are down 18 percent from a year ago. Spare production capacity is significantly lower than it was at the time of the Gulf War 12 years ago.

"You would think oil markets would show more concern," said Merrill Lynch energy analyst Michael Rothman. "There is still significant upward risk in the price of oil."

Market participants are calculating that such producers as Saudi Arabia will make up for any war-related shortfall. In addition, the United States and other leading petroleum consumers may tap into strategic reserves, putting millions of additional barrels of oil on the market.

Much of the action on the oil market reflects the eagerness of traders to sell before war starts, analysts said. During the opening days of the Gulf War,

oil prices plunged by about a third when it became apparent that the United States and its allies were winning a quick victory.

The hard-pressed economies of the United States, Europe and Japan badly need lower energy prices.

Economists from Federal Reserve Chairman Alan Greenspan on down have cited geopolitical risk -- the danger of war -- as the main drag on the world economy now.

"When analysts talk about geopolitical risk, they divide it into two parts, " said Randy Moore, editor of the newsletter Blue Chip Economic Indicators. "One is the reluctance of businesses and consumers to spend and invest. The other is the effects on the economy of a rise in oil prices."

Partly because of those effects, economists have been cutting back their growth predictions for the U.S. economy. Early last year, forecasters polled by Blue Chip Economic Indicators predicted that the U.S. economy would grow 3. 2 percent in 2003. By this month, that forecast had been trimmed to 2.6 percent, with higher energy prices an important factor in the reduced expectations.

Chronicle news services contributed to this report. / E-mail Sam Zuckerman at szuckerman@sfchronicle.com.

www.chicagotribune.com Special report Business By William Neikirk Tribune senior correspondent Published March 19, 2003

WASHINGTON -- Every conflict has winners and losers, but a war with Iraq could hurt many Americans economically if it lasts longer than the few weeks projected by the Bush administration, experts say.

A longer-than-expected war could spell the end for one or two airlines, keep gasoline prices high, reduce consumer spending and possibly push the U.S. and world economies into recession, according to economic analysts.

From President Bush's standpoint, dispatching Saddam Hussein swiftly has not only major military and political significance, but also far-reaching economic implications. A quick, relatively painless war could hasten a return to confidence and speed decisions by businesses to invest and hire again.

Yet even if the war is short, the U.S. economy remains too weak to bounce back strongly, said David Wyss, chief economist at Standard & Poor's Corp. Businesses remain burdened by overinvestment from the 1990s, and demand for U.S. goods is weak worldwide.

"We won't go back to a strong recovery pattern," Wyss said.

The number of war winners is likely to be sparse. The postwar reconstruction period in Iraq could prove highly profitable for U.S.-based international construction firms, such as Bechtel Corp. Defense contractors will rake in more earnings from bomb and missile orders.

But in the job market, where it counts for most Americans, the war could cause higher unemployment if U.S. forces are not successful quickly. To Campbell Harvey, professor of international finance at Duke University, the longer the war persists, the more severe the economy's troubles will become.

John Silvia, chief economist at Wachovia Securities, said a swift war would not rejuvenate the job market anytime soon.

"Jobless claims are not going down, and help-wanted advertisements continue to be low," he said. "It tells you the employment market is not in good shape at all."

A war of any length will be hard on the long-term unemployed, Silvia said. Since 2000, the number of Americans who have been out of work 27 weeks or more has tripled. This group now represents one-quarter of the unemployed.

Kurt Barnard, president of the Barnard Retail Consulting Group in Upper Montclair, N.J., said he is concerned that retailing will be hurt by fears of terrorist attacks in the U.S. If only 2 percent or 3 percent of shoppers stay away from malls, he said, sales could be sharply reduced.

In general, Barnard said, war makes people conservative about spending their money.

"Their mood will not be one of happiness. The mood will be sober," he said, adding that consumers are likely to forgo buying big-ticket items such as cars.

Another loser will be the U.S. taxpayer. The cost of fighting the war--estimated as low as $61 billion and as high as $200 billion--will be borne by American taxpayers, unlike the Persian Gulf war in 1991, when many other nations chipped in. In addition, taxpayers will be on the hook for much of the cost of reconstruction in Iraq.

Bush administration officials say Iraqi oil will help defray reconstruction costs. But Michael Drury, chief economist at McVean Trading and Investments, a Memphis-based futures trading company, disputed that assessment.

"The idea that oil revenues will pay for reconstruction is a joke," he said. "Now it is taking all their oil revenues just to feed the country, to keep the people from starving."

A key economic issue will be how high the price of oil will go during hostilities and how long it will take for that price to fall. Laurence Meyer, economist at the Center for Strategic and International Studies and a former Federal Reserve member, said that if there is no damage to the oil fields, oil prices could settle down to $25 to $30 a barrel by the end of the year.

In Tuesday's trading, oil prices on the New York Mercantile Exchange dropped 9 percent, to $31.67 a barrel, the lowest price in two months, on expectations that the war will be over quickly and that global stockpiles are sufficient to satisfy demand. But if war fortunes take a turn for the worse, oil prices could skyrocket, said Harvey of Duke University.

The fear of oil prices surging over $40 a barrel and staying there for months during a difficult conflict may have dissipated for now. But the very possibility of this underscores the economic importance of a quick victory.

"A lot of the current thinking is that oil prices may stay up longer than people think," said Carl Tannebaum, chief economist at Chicago's LaSalle Bank. "We have depleted a lot of supply, and [oil supplier] Venezuela is still in the midst of a general strike."

Opinion is divided on whether investors will be the winners in war. Bush's ultimatum for Hussein to leave Iraq by Wednesday night or face U.S. military action caused a rally on Wall Street. But now the question is whether the market will continue rising.

"Initially, the markets respond favorably because there is some resolution of what is going to happen," said Ed Peters, chief investment officer at PanAgora Asset Management Inc. in Boston. "If things go swiftly [in the war], the market will continue to do well. If the victory is messy, that could make it worse."

In the long run, however, stock prices require a stronger economy with greater corporate profitability, Wyss said. And even if the war is short, he said, it would take time before the recovery gathers enough steam to drive stock prices higher.

The travel industry, which suffered disproportionately during the 1991 Persian Gulf war, is again likely to be a major loser in this conflict. The airline industry, in a plea for more government assistance, already has warned that its business could be hurt drastically by war.

"Even without a war, you might lose an airline," Wyss said. "And by that, I mean liquidation, not just bankruptcy."

www.abs-cbnnews.com By NEELA BANERJEE The New York Times

Consumers may be complaining mightily about gasoline prices, but so far they are not buying less, industry experts say. That, in turn, is helping to keep gasoline prices high.

The Energy Information Administration (EIA), the analytical arm of the Energy Department, predicts that even if crude oil-prices decline over the next few months, retail gasoline prices will probably stay high, averaging $1.76 a gallon in April. The current average retail price of gasoline is $1.73 a gallon, the Energy Department said.

“At the margin, which is where prices are set, any measurable increase or decrease in demand will have an effect on price,” said Lawrence Goldstein, president of the Petroleum Industry Research Foundation. “We’re seeing a very slow increase in demand. But if demand is still going to grow, prices will stay high relative to crude oil.”

Because of changes in Americans’ driving habits over the last decade, the demand for gasoline changes little, even when prices climb. The vehicles that many people are driving, most notably sport-utility vehicles and light trucks, get far lower gas mileage than cars did 20 years ago.

In roughly the same period, the number of drivers has increased overall, as has the number of miles people drive each year, according to David Costello, an analyst with the EIA. And despite the widespread grousing about high fuel prices, when adjusted for inflation, prices are actually lower than they were 20 years ago, Costello said.

“There’s no doubt about it that people are grumbling,” said Scott Hartman, president of the CHR Corp., which owns 51 convenience stores with gas stations around York, Pennsylvania. “But we don’t see any changes in the gallons that they’re buying. Actually, we’re seeing some nice growth figures.”

At its meeting last week in Vienna, the Organization of the Petroleum Exporting Countries argued that a seasonal drop in demand would help keep a lid on crude oil prices, which have stayed over $30 for weeks now. On Tuesday, the price of crude oil for April delivery fell $3.26, or 9.3 percent, settling at $31.67 a barrel on the New York Mercantile Exchange.

Gasoline futures followed suit, with the wholesale price of fuel for April delivery falling 6.52 cents, to 96.19 cents a gallon, the lowest end-of-session price since February 3.

Analysts and traders said the decreases were impelled by a belief in the oil markets that a war with Iraq would be quick and would result in little damage to oil fields. Other analysts warned that no one could predict what might happen in Iraq. More important, they said, the underlying factors that have driven up crude oil and gasoline prices persist, and an American victory in Iraq would not change them overnight.

OPEC made a series of output reductions last year that buoyed prices and led oil companies and refiners to draw down their inventories of crude oil and petroleum products. In the winter, when companies normally build stocks of gasoline for the spring and summer, supplies of crude oil plummeted after a strike brought Venezuela’s oil exports to a halt.

Then, a cold winter in the Northeast and mid-Atlantic motivated refiners to squeeze more heating oil from a barrel of oil, at the expense of gasoline. Now, supplies of crude oil, gasoline and heating oil are at their lowest levels in years.

With crude oil prices so high and stockpiles so low, consumer demand has proven to be an important factor in buoying gasoline prices. The question is, how high do prices have to go before car owners change their driving patterns?

California, where prices commonly exceed $2.00 a gallon, now has the most expensive gasoline in the country -- largely because of its environmental regulations. California requires an additive to make cleaner-burning gasoline, ethanol, that constrains how many gallons of gasoline can be wrung from a barrel of oil and complicates the refining process.

But Tom Robinson, chief executive of the Robinson Oil Corp., which is based in San Jose and owns 28 local gas stations, said his customers continued to buy as much gasoline as they did before prices shot up.

“In California, we’ve had numerous run-ups, and this is the highest so far,” Robinson said. “And people know when the price goes up, it will come down.”

Some industry analysts and consumer groups said people might drive less if prices approached $3.00 a gallon or stayed near $2.00 a gallon for an extended period. But others contend that consumers adjust to prices.

“It has been our contention since the 1970s that consumers really don’t change their driving habits on the basis of price,” said Geoff Sundstrom, a spokesman for the Automobile Association of America. “They only change due to supply problems. At this point, the tightness in the markets is pretty much invisible to consumers in that they’re not going to gas stations that have run out of fuel.”

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