sg.biz.yahoo.com By Campion Walsh Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- Iraq is why President George W. Bush's administration took the unusual step this week of publicly asking the Organization of Petroleum Exporting Countries for more oil, industry analysts said.

ADVERTISEMENT While the Bush administration is worried by reduced oil supply due to strikes in Venezuela, it's the prospect of war with Iraq and a suspension of some of the Persian Gulf country's 2.4 million barrels a day of production that led the State Department to say publicly Wednesday it would be positive for OPEC to deliver more oil.

"It's all part of the psychological warfare, if you will," said Fadel Gheit, oil analyst for investment bank Fahnestock & Co. The Bush administration is effectively saying, "Saddam is not going to get away with anything ... and sending a message to the oil markets and the world not to panic," Gheit said.

Analysts say the U.S. strategy effectively divides responsibilities for the two international issues preoccupying oil traders.

Under this scenario OPEC will address the steep drop in Venezuelan oil production since early December from its previous rate of nearly 2.6 million barrels a day; while the U.S. government's strategic petroleum reserve and other emergency stockpiles will be used if war breaks out in Iraq.

"The last thing (Bush administration officials) want during a war with Iraq is for another significant OPEC exporter to be off-line the way Venezuela is now," said Aaron Brady, oil analyst at Wakefield, Mass.-based Energy Security Analysis Inc.

Releasing crude now from the 599-million-barrel SPR would bring crude oil prices down, but it could also cause alarm in light of the Bush administration's policy of only using SPR crude for international supply emergencies, analysts said. Bush and Vice President Dick Cheney pointedly criticized President Bill Clinton for tapping the reserve in non-emergency situations, and they're trying to set the bar high for situations that do warrant a release, analysts said.

OPEC Likely Wasn't Audience For State Department Remarks

While OPEC's emergency meeting Sunday in Vienna is expected to yield a significant production increase, the group's long-running production above quota has already helped to cushion some of the shortage from the Venezuela strikes, now in the fifth week.

Additional oil supply as a result of the meeting may serve as much to address market concerns about Iraq as it does the physical shortfall from Venezuela, said Vahan Zanoyan, president of the Washington-based consultancy Petroleum Finance Co.

"I would find it hard to believe that this is just about Venezuela," Zanoyan said. "By the time an OPEC increase arrives it will be mid- to late-February, and by then we're almost entering the routine maintenance period when refineries don't really need as much crude."

Many refineries shut down around March to conduct routine maintenance and to adjust operations to produce more gasoline for the summer driving season. The shutdowns, which can last several weeks, reduce crude demand.

Analysts said OPEC didn't need private or public prodding from the State Department this week to see it's in its own interest to boost production when crude oil prices rise above $30 a barrel for a sustained period, as the front-month New York Mercantile Exchange futures contract has since mid-December.

State Department spokesman Richard Boucher's comment that it would be "positive" for OPEC to raise supply was probably meant to calm markets and the general public, rather than to influence Saudi Arabia or any other members of the oil-exporters' group, they said.

"This could be in part in preparation for anticipated conflict in Iraq, either destruction from the war or its psychological effect," Zanoyan said.

Gheit of Fahnestock & Co. said the U.S. may be taking a third precaution for the oil-market impact of a potential war in Iraq, beyond releasing crude from the SPR or calling on OPEC for emergency supply. The U.S. military may be stockpiling oil beyond the scope of data-collection agencies and market reporters, he said.

"There has been hoarding by governments including ours off the books," Gheit said, suggesting various military facilities and vessels outside the scope of commercial analysis could be storing oil beyond what would be needed for a successful war against Iraq.

While Iraq is the main issue, Venezuela has been a contributing factor in the Bush administration's public expressions of concern about the market, analysts said. The strikes have reduced world supplies by more than 75 million barrels so far, and the U.S. Energy Department's Energy Information Administration said Wednesday it may take until June to get Venezuela's output back to normal even if the strikes are resolved in February.

The Energy Department has deferred winter delivery of nearly 11 million barrels of crude to the SPR, freeing the oil up for use by refiners. And Energy Secretary Spencer Abraham has said he's monitoring the situation in Venezuela closely.

-By Campion Walsh, Dow Jones Newswires; 1-202-862-9291; campion.walsh@dowjones.com

cbs.marketwatch.com Commentary: Long-lasting consequences if cartel fails By Joe Duarte Last Update: 12:04 AM ET Jan. 11, 2003

NEW YORK (CBS.MW) -- Are OPEC's days numbered? The possibility is higher than most people are willing to admit.

As the U.S. nears its almost certain invasion of Iraq, and potentially establishes a long term foothold in the Middle East, events are likely to follow that will change the world as we know it perhaps for the rest of the 21st century.

Even as the major media postulates that oil prices could reach $40 to $50 per barrel it is important to note that there is enough oil available to power the U.S. for the near future despite rising prices and the fear of a global energy crisis. The only sticking point is whether consumers are willing to pay the increasing costs of exploration, extraction, and security that will continue to increase as the U.S. embarks on its occupation and reshaping of the Middle East into what it hopes will be a more market friendly, al-Quaida-free region.

More important in the developing story of global energy is what the possible repercussions will be when OPEC collapses or becomes nearly ineffective in its quest to control oil prices.

There are two major political and strategic hot spots in the energy world at the moment, and they are both critical to the survival of OPEC. Whatever comes out of these two important places will have crucial relevance to the price of oil and the way the world does business in the foreseeable future.

First there is Venezuela, where the noose is tightening around the neck of President Hugo Chavez, and his Bolivarian revolution. Chavez' government is out of potential revenue as his oil industry is almost completely inactive, at the same time that his foreign currency reserves are drying up.

The collapse of Venezuela is an important domino in the saga of OPEC since under Chavez it has been the strongest proponent of keeping oil prices high by controlling production.

But instead of unity in OPEC as its champion of austerity has fallen, Saudi Arabia and others are stepping up and offering to increase production, making up for the shortfall and decreasing Venezuela's market share of OPEC production, most likely for a long time. The only country that has shipped any oil or significant aid to Venezuela during the crisis is Brazil, which is not an OPEC member. This is a clear sign of the tenuous loyalty within the cartel and a suggestion of what the future holds if another major member runs into the same problems that have all but killed the Venezuelan oil industry.

Venezuela is beyond repair for several years. But the reasons for its fall are not exclusive. All OPEC countries have similar problems due to their non-Democratic governments and the subsequent creation of true economic class-warfare where oil money usually stays in the hands of the government and the ruling class.

Therefore it is not hard to envision a set of circumstances, either concurrent with, or spurred by the U.S. attack on Iraq, where the streets of Riyadh could resemble those of Caracas, and where oil supply disruption from Saudi Arabia could also occur in a similar fashion to Venezuela.

Is there going to be a 1970s style oil crisis in the United States? Not likely, although the possibility is certainly there. For one thing, the U.S. is a much more energy efficient nation now than it was then. And for another, there are plenty of alternate sources of oil available in non-OPEC producers, although it could take some time to bring them online and to do so could be expensive.

But what many are not counting on is the fact that a war in Iraq could spark major political problems in Saudi Arabia, where Islamic militants are numerous and where the ruling family is increasingly unpopular and facing many internal and external difficulties. The major oil companies have not made a deal with the kingdom for a chance to exploit its natural gas reserves, although negotiations have been ongoing for several years. This is a sign that the smart money is finding it much too risky to do business in the kingdom, and that trouble is already present there.

If there is major trouble in Saudi Arabia, the government will have little choice but turn away from international issues in order to preserve its own country, as the oil rich kingdom could become vulnerable to either an externally or internally mediated regime change of its own. It is there that it could easily lose control of OPEC. As a result, internal production controls on the cartel would weaken and most likely disappear altogether.

Once the uncertainty and the shock of the situation fades, the most likely scenario would be a flood of oil hitting the market soon thereafter, and the collapse of the cartel.

The flood is likely to come from other OPEC countries such as Libya, and Nigeria that are desperate for foreign capital and are trying to win favor from the United States, since they don't want to be the next countries to be invaded as the war against terrorism spreads its wings from a newly established U.S. military fortress in Iraq.

Other members of the cartel are already U.S. friendly and include Kuwait and Qatar, where the U.S. has significant military installations present. Non-OPEC countries would also scramble to increase their market share. Iraq's own oil industry could take months to years to bring back up to maximal production levels, so it would not be a short-term solution.

On a longer term basis, perhaps within the next 12-18 months, the U.S. is likely to see increasing supplies from Russia, which is aggressively improving its infrastructure, including a key pipeline to Murmansk, a Siberian port that remains open year around. Russia has already been quietly shipping oil to the U.S. Strategic Oil supply, with the first shipment arriving in July 2002.

Also being ignored are the tar sand deposits from Canada and the restricted lands under the protection of the U.S. Government in Alaska, the Rocky Mountains and the Gulf of Mexico.

Canada may be a longer-term prospect, as there have been technology issues that have slowed development. But U.S. Government land, regardless of environmental group opposition, is easily attainable supply especially under the pretext of national security.

What's the bottom line? We could easily see a short-term and possibly dramatic spike in the price of crude oil, with gasoline near $2.00 a gallon. But as the U.S. gains control of Iraq and the political problems begin in Saudi Arabia, in the wake of an already powerless Venezuela, a collapse in the price of crude is highly likely sooner rather than later, followed by an economic recovery in the U.S., and to a lesser degree, Europe. The biggest winner of all may be Japan and China, whose economies may benefit most from cheap oil.

What's the fly in the ointment? A major setback in the early going for coalition forces once they decide to invade Iraq.

Dr. Joe Duarte's Daily Market I.Q. is available at www.joe-duarte.com. Dr. Duarte is the author of "Successful Energy Sector Investing."

ogj.pennnet.com Maureen Lorenzetti Washington Editor

WASHINGTON, DC, Jan. 10 -- New York state is expected to formally ask the US Environmental Protection Agency to waive a federal clean air rule that requires fuel suppliers to sell reformulated gasoline (RFG) with an oxygenate, typically ethanol or methyl tertiary butyl ether (MTBE), sources familiar with the request said.

In June 2001, EPA rejected California's petition to obtain a waiver of the 2 wt % oxygen requirement for reformulated gasoline. A source familiar with the waiver request said that New York's argument this week will be that an oxygen-free clean fuel is a better way to stop smog than using a fuel that contains ethanol. Both New York and California are banning MTBE because of groundwater contamination concerns next year. Connecticut, meanwhile, has a ban on MTBE that takes effect this October. Washington state's ban is also scheduled for this year. An earlier MTBE ban in Arizona expired in 2001. Five other states, including Colorado, Nebraska, South Dakota, Minnesota, and Iowa already have bans on MTBE. Meanwhile, Kansas, Illinois, and Indiana have bans that take place in 2004 like California and New York. And by 2006, a total of 16 states plan to have bans in place, according to American Petroleum Institute data.

EPA rejection Shortly after EPA rejected California's request, the state filed a lawsuit against the agency. The National Petrochemical & Refiners Association also filed an amicus brief in support of California.

NPRA's brief says that the "real-world impact" of EPA's decision to deny the California waiver request "is to establish an ethanol mandate for RFG within California. NPRA officials also reminded the court of the decision in API and NPRA v. EPA, which struck down EPA's 1994 attempt to impose a nationwide ethanol mandate in reformulated gasoline.

New York state officials did not respond to a request for comment on the waiver request.

Fuel suppliers in both the Northeast and California have told EPA they are worried about the impact of MTBE bans on fuel supply if they must use ethanol to comply with current clean fuel rules.

MTBE bans effect A recent API analysis shows that current and anticipated state MTBE bans could put undue pressures on fuel delivery systems in the coming years, creating temporary fuel shortages and price spikes. Barring a legislative fix by Congress or a change of heart by EPA, over half of the estimated 159,000 b/d of ethanol production (2.7 billion gal/year) will have to be shipped to either coast later this year.

Currently, the Midwest uses nearly all of that capacity, according to API. Without that ethanol volume, Midwest refiners will have to replace missing barrels in a market that could be facing other supply pressures because of disruptions in Venezuela and Iraq.

Suppliers are hoping that, given the unsettled short-term nature of world oil markets these days, the White House may step in and encourage EPA to reverse itself on California and allow Northeast states the same flexibility. California fuel marketers recently urged the agency to consider allowing them to use both MTBE and ethanol in fuel for an unspecified period while the state makes the transition to all ethanol-blended RFG.

english.eastday.com

OPEC is poised to approve a plan for a Saudi Arabia-led increase in oil production to end shortages caused by a strike in Venezuela and to lower prices from around US$30 a barrel, analysts said.

OPEC probably will add between 1 million and 1.5 million barrels a day to its output quota of 23 million to get prices back to its target of US$22 to US$28, analysts said. That move won't fill the loss of 2.3 million barrels a day from Venezuela.

Just a month after agreeing to cut supply, the Organization of Petroleum Exporting Countries is changing course. Concern for Venezuela's crippled oil industry and a possible U.S. war with Iraq sent oil prices up 44 percent in London last year, the second-largest gain of the past two decades.

"Current prices are seen as a problem, and Saudi Arabia is prepared to throw oil at that problem," said Paul Horsnell, head of energy research at J.P. Morgan Chase & Co. in London, who expects OPEC to raise quotas by 1.2 million barrels. OPEC holds almost 80 percent of oil reserves and pumps only a third of global supply.

Tomorrow's meeting will be OPEC's second in a month. In phone calls between the group's representatives, Saudi Arabia, the world's largest producer, failed to convince other members to agree to boost quotas by 1.5 million to 2 million barrels a day.

Oil importers from the U.S. to India, Asia's fourth-largest consumer, are lobbying OPEC to pump more oil. Rising energy prices lead to higher costs for airlines such as AMR Corp.'s American Airlines and increase gasoline and heating bills, which may undermine growth in the world economy.

Concerned rising oil costs may spur development of competing forms of energy, OPEC has agreed to consider increasing output when oil prices stay above the target for 20 consecutive days, based on a benchmark index of seven types of crude oil. OPEC's benchmark price was US$29.51 yesterday, the 17th trading day above the range, meaning the accord may be triggered on January 14.

In Vienna on December 12, the 11-nation OPEC set a two-pronged strategy to curb overproduction and avoid a price decline later this year. To bring members closer to the quota, the group raised the daily output target to 23 million barrels while pledging to cut supplies by as much as 1.7 million barrels a day.

Because members other than Venezuela are cheating on quotas, tomorrow's expected announcement may not result in as much supply as promised. Also, some members, such as Indonesia and Kuwait, already are pumping as much as they can, analysts said.

"It's not going to result in many more barrels than in December," said Lawrence Eagles, head of commodities research at GNI Ltd.

"It will depend on how much more Saudi Arabia is prepared to supply."

OPEC will distribute any production increase on a pro-rata basis, based on members' current quotas, even though Venezuela can't meet its share, said OPEC President Abdullah bin Hamad al- Attiyah, who is also Qatar's oil minister, in New Delhi.

Saudi economist Ihsan Buhulaiga, a member of a council that advises the kingdom's government, said he expects an increase of 1.5 million barrels a day.

"My biggest worry is that an increase of this size could cause a glut and a price crash later in the year," Buhulaiga said. The move "will most likely push prices down to close to US$25 a barrel," he said.

www.morningstar.ca 10 Jan 03(4:33 PM) |  E-mail Article to a Friend

NEW YORK (Reuters) - U.S. oil prices slipped on Friday as expectations that OPEC will boost crude production at an emergency meeting this weekend outweighed a dearth of crude from Venezuela and concerns about a possible war with Iraq.

Traders were awaiting the decision of an emergency meeting of the Organization of Petroleum Exporting Countries Sunday in Vienna, where ministers are expected to agree an output increase of around 7 percent to help compensate for deep supply losses from a Venezuelan strike.

Crude futures on the New York Mercantile Exchange settled 31 cents lower at $31.68 per barrel. In London, Brent crude settled up 3 cents at $29.67 per barrel. On Thursday, NYMEX crude futures had jumped $1.48 per barrel on the concerns over Venezuela and Iraq.

The 40-day-old Venezuelan strike continued to raise concerns about supply and the market digested mixed signals on the likelihood of war in Iraq.

The U.S. government planned an initiative to form a group of nations to help end the strike in Venezuela, the world's fifth largest oil exporter, a U.S. official said.

Washington hoped the idea could support Organization of American States Secretary-General Cesar Gaviria's efforts to end the crisis, which pits the leftist president against opposition groups who wish to oust him, the official said.

On Friday, Chavez said he fired nearly 1,000 employees of state oil company Petroleos de Venezuela, from the thousands of PDVSA workers who have joined the strike.

Venezuela supplies about 13 percent of U.S. crude imports. The strike has knocked production down to one-fifth of its 3.1 million barrel levels, the government says. Opposition leaders say the level is even lower.

WHEN TO TAP RESERVES

Oil was also pressured by the possibility of preliminary talks at the Paris-based International Energy Agency on tapping European reserves. The acting head of IEA said Friday war in Iraq, if it coincided with an ongoing strike in Venezuela, could trigger deliveries from the IEA's strategic oil reserves.

"Iraq and Venezuela both being out would certainly be enough for the IEA to think about an emergency release," Acting Executive Director William Ramsay told Reuters in an interview.

"But we don't need to wait for a war, if there is one, because we've already lost 3 million barrels a day from Venezuela."

He said talks could start as early as a scheduled governing board meeting on Jan. 17 at IEA headquarters in Paris, depending on the oil market's response to Sunday's OPEC meeting.

The United States has not tapped national reserves. The Department of Energy said this week it has allowed U.S. oil companies to defer deliveries of a total of 3.1 million barrels they had owed national petroleum reserves to September.

Prices rose strongly Thursday after comments from chief United nations weapons inspector Hans Blix hardened the case for a U.S.-led invasion of Iraq.

Prior to a U.N. Security Council briefing, Blix told reporters that, after seven weeks in Iraq, the arms inspection team had found no "smoking guns" but that he was dissatisfied with Iraq's 12,000-page weapons declaration.

"We think the declaration failed to answer a great many questions," he said.

But a spokesman for British Prime Minister Tony Blair said a Jan. 27 deadline for the U.N. inspectors' full report was not a deadline for a decision on war.

And Secretary of State Colin Powell backed up the British view. "It's not necessarily a D-day for decision making," he said.