Motorists could see spike in fuel prices this spring By Alan Zibel - BUSINESS WRITER

California's largest gasoline suppliers are starting a changeover in gasoline formulas this week that will remove the polluting chemical MTBE but could send gas prices up to $2.50 or $3 a gallon between April and June.

The fuel additive MTBE (methyl tertiary butyl ether) is being eliminated from California gasoline because it is a suspected cancer-causing chemical that has polluted water supplies.

To meet federal gasoline standards, California refiners are replacing MTBE with ethanol, most of which comes from Midwestern corn.

Some oil companies, though, won't be making the switch until the end of the year. That means some Bay Area gas stations -- mainly independent operations without major brand names -- will be selling gasoline with MTBE this year. Other stations will use ethanol-blended fuel.

Experts say consumers should have no problems putting ethanol-blended gasoline and MTBE-blended gasoline in the same tank. A large sign proclaims Union 76 gasoline no longer contains the fuel additive MTBE.

"You would not see any performance issues or anything like that," said Wil- liam Rukeyser, assistant secretary of the California Environmental Protection Agency. "During this transition period, drivers don't have to be concerned about which one they put in, or in what order."

There is some disagreement, however, about whether pump prices will skyrocket.

David Hackett, president of the Irvine-based consulting firm Stillwater Associates, said he sees a good chance there will be a 50 to 100 percent price spike between April and June, as refiners switch from winter gasoline formulas to the summer variety.

That transition phase is when gas supplies are the tightest, he said, and the supply/demand balance is most vulnerable to refinery breakdowns.

"I hope we're wrong," Hackett said.

When gasoline is made with MTBE in California, it makes up about 11 percent of the gasoline mix, compared with 5.7 percent for ethanol.

Oil companies will have to make up the difference somewhere and don't have the capacity to produce more gasoline, especially in the summer driving season, Hackett said. He predicted that refiners will have to import gasoline from around the world, and that California gasoline imports will double to about 100,000 barrels a day.

Still, one oil analyst, Tom Kloza of the Oil Price Information Service, said ethanol might not necessarily be to blame for upcoming gasoline price spikes. Retail gasoline prices typically shoot up in the spring, as oil companies have to quickly change gasoline blends. Adding ethanol will make the switch more complicated, but it shouldn't necessarily be blamed for price spikes, he said.

"There's a period of adjustment there, (but) I wouldn't want to cast the blame on ethanol," Kloza said.

Rukeyser said that any price jump from the switchover to ethanol is probably going to be small compared to other factors such as a possible war in Iraq, and the shutdown of oil production in Venezuela.

"Ethanol is going to cause a very small ripple in an otherwise stormy sea," Rukeyser said.

Amid concern about price spikes, Gov. Gray Davis last year pushed back the state's original deadline for getting rid of MTBE by one year, to the end of 2003.

Still, oil companies BP, Shell and ExxonMobil decided to make the switch in the first half of this year. San Ramon-based ChevronTexaco, the state's second-largest seller of gasoline, said Wednesday that it will complete the transition by May in Southern California, but did not give a date for its refinery in Richmond.

Tesoro Petroleum and Valero Energy, both of which own Bay Area refineries and send much of their output to local independent gas stations, are not making the change to ethanol here until the end of the year, or sometime near then.

United Kingdom-based BP, which owns about 1,200 Arco gasoline stations in California and is the largest seller of gasoline in the state, will start delivering ethanol-blended gasoline to its stations beginning this weekend, spokesman Paul Langland said.

"It takes a while for the underground storage tanks at the stations to get rid of the MTBE and become basically all ethanol," he said.

The transition should be complete by the end of March, said Langland, who predicted a 5- to 10-cent increase in the price of gasoline due to ethanol.

Shell spokesman Cameron Smyth said his company started delivering ethanol-blended gasoline this week. Shell owns a refinery in Martinez, as well as two in Southern California. The changeover will be phased in at Shell gasoline stations around the state in the coming weeks, he said.

ConocoPhillips, which owns Union 76-branded gas stations and an oil refinery in Rodeo, already has switched over to ethanol and has been advertising MTBE-free gasoline at its stations.

Alan Zibel can be reached at azibel@angnewspapers.com (925) 416-4805.

By Carola Hoyos in New York Published: January 9 2003 4:00 | Last Updated: January 9 2003 4:00

Additional crude oil is already reaching markets affected by the shortfall in Venezuelan supplies, storage data revealed yesterday.

The news sent world oil prices lower for a third straight day this week and prompted some analysts to predict that the Opec oil cartel would raise its 23m barrel-per-day output ceiling in line with current production at this Sunday's meeting in Vienna, rather than substantially increase production.

"Output is already there, that's what the inventory data is telling us. Opec is going to confirm what has already taken place," said Adam Sieminski, analyst at Deutsche Bank. "The market is now balanced and the loss of Venezuela has been made up."

Crude oil imports into the US rose 658,000 barrels to 8.3m b/d, according to Department of Energy statistics. The department does not furnish data breaking down by country weekly US imports, but some analysts speculated that Saudi Arabia may have tapped into its crude storage in the Cari-bbean.

Benchmark crude oil prices in London and in New York, yesterday fell to less than $30 a barrel, which could push Opec's crude oil basket below $28 a barrel - within its $22-$28 target band - for the first time in more than two weeks.

At midday the Nymex February contract price had recovered slightly and was trading at $30.35, down 73c, while London's IPE Brent contract traded at $28.37, down 96c, in reaction to the bearish inventory data.

The US Department of Energy said the country's crude stocks rose 400,000 barrels to 278.7m barrels for the week to January 3, defying expectations of a 5m-6m barrel reduction.

Despite the unexpected data, analysts warned that storage levels remained at historic lows and that the possibility of a war with Iraq meant that prices were unlikely to fall much more than to the middle of Opec's $22-$28 range.

Nevertheless, some more bearish market observers warned that Opec could not forget about the underlying seasonal drop in demand for crude oil expected in the first two quarters of the year.

Opec yesterday confirmed that it would hold an emergency meeting on Sunday in Vienna.

Sheikh Ahmed, Kuwait's oil minister, said yesterday that Kuwait supported a rise in Opec production of about 1m b/d, warning that his country was unlikely to be able to increase its production because of ongoing industry repairs.

"Increasing production by 1m b/d is reasonable and enough to stabilise the oil market," he said.

Non-Opec producers, such as Russia and Norway, have also said that they are already producing at close to maximum capacity.

Saudi Arabia, Opec's biggest producer, and Qatar, the group's president this year, want to agree an increase of at least 1.5m, but much of this may already be reaching consumers, analysts said.

Opec promised to reduce its production at its last meeting in December, but traders say those cuts were never fully implemented because of the growing realisation that the Venezuelan strike would not be resolved quickly.

"I don't think they ever cut," Mr Sieminski said.

In Washington, a State Department official said that a substantial increase in Opec output would be "a positive development".

The oil cartel that sparked recession in the 70s is now cast as an economic cavalry

Larry Elliott and Charlotte Denny Thursday January 9, 2003 The Guardian

Thirty years ago, the idea of Opec meeting as the world was planning war in the Middle East would have sent shivers down the spine of the markets. But at this Sunday's assembly in Vienna, the 11-member oil producers' cartel will be playing the role of John Wayne riding to the rescue of the world economy.

As oil prices last week surged well above $30 a barrel to their highest level for two years, Saudi Arabia - the world's largest oil producer - let it be known it was prepared to back an extra 2m barrels a day production for the world's energy supplies. The announcement provided immediate relief to a jittery market: prices fell by more than a dollar.

The Opec meeting has been called to discuss the Saudi plan. Opposition from the rest of the cartel could mean a smaller boost to production but, as the only producer with significant spare capacity, the Saudis hold all the important cards.

Kuwait's oil minister, Sheikh Ahmad al-Fahd al-Sabah, said yesterday an increase of between one and 1.5 million barrels per day was the most likely outcome. This would add between 4% and 7% to Opec's 23 million barrels a day production.

It's all a far cry from 1973, when the launch of the Yom Kippur war sparked an Arab boycott of the western states supporting Israel. Oil prices soared fourfold to $11, killing off the long post-war boom in the west that had seen record increases in living standards. A second price increase at the end of the 1970s and a third at the time of Iraq's invasion of Kuwait in 1990 had the same outcome - recession in the west accompanied by a period of falling oil prices.

Both Opec and the west have learned from the past three decades' destabilising shocks that a managed market makes sense for exporters and for importers. Despite the arrival on the scene of new, non-Opec producers like Russia, the members of the Opec cartel still account for 40% of world output. More to the point, the Saudis are the linchpin not just of the cartel but of the whole oil market.

"Non-Opec countries tend to run always at full capacity and so the spare capacity is almost entirely in Opec countries", said Paul Horsnell, an oil analyst at JP Morgan. "While there is a common perception that Russia in particular could somehow help, the reality is that they cannot."

Two factors account for the price of oil rising above $30 a barrel at the turn of the year. First, the drum beats of war from Washington grew louder, raising fears that early 2003 would see the long threatened US-led attack on Iraq. Secondly, a strike paralysed Venezuela's refineries, cutting off supplies from the world's fifth biggest oil exporter and the source of 13% of America's oil imports.

These factors pushed prices well above the $22-28 a barrel price band that Opec believes guarantees a decent return for producers without strangling the global economy. At the present juncture, with the US, Europe and Japan all struggling, cheap energy is regarded by economists as a crucial ingredient for recovery.

Paradoxically, the Saudis seem more concerned about the impact of a $30-plus a barrel price on the global economy than the Bush administration. If the White House ordered it, the US could draw down from its massive strategic reserves stashed away in four salt caverns in Texas and Louisiana. America's stockpile stands at an all time high of 600m barrels, enough to keep the world's biggest economy running for 60 days - even if all imports stopped overnight.

So far, Mr Bush has declined to turn on the taps - even though as a former oil man he knows how vital crude is for the American economy. The administration's own macroeconomic forecasters believe the US is robust enough to withstand a crude price of $30 a barrel - still well below its peak of the early 1980s once inflation is taken into account. Moreover, they point out that petrol prices at filling stations have increased by far less than the cost of crude would suggest.

Mr Horsnell says the White House is also wary of giving an open-ended commitment to fill the hole in the market left by the shutdown of Venezuela's oil industry, fearing that it could run down the reserves at a time when a far greater crisis is looming in the Persian Gulf.

Raiding the reserves now, before a shot has even been fired, would open the Republicans to the same charge they levelled at Bill Clinton in 2000 - that they were using a strategic economic weapon for political purposes.

The Americans, along with virtually every oil market analyst, are also assuming that a war - should it happen - will be short, sharp and decisive. A far more troubling eventuality would be Saddam Hussein not only removing Iraq's 2m barrels a day from the market but also launching successful strikes on ports in Kuwait and Saudia Arabia. Under those circumstances, analysts are convinced the price would quickly spiral.

Goldman Sachs has worked on a scenario under which oil supplies are disrupted by Iraqi attacks on Saudi and Kuwaiti fields, which would send the price to $50 a barrel and cut growth in 2004 from 2.4% to 1% in the US and from 1.9% to 1% in Euroland; but its analysts put the chance of this at only 15%.

But even a war that goes according to the Pentagon's plans may have some serious consequences for the oil market.

The dream scenario for Washington is that the ousting of Saddam Hussein is followed by the creation of its own Middle Eastern client state - which will ensure security of cheap supply of oil. By and large, this was what underwrote western prosperity in the golden decades of the 1950s and 1960s.

But cheap oil is a problem for the rest of the Middle East, particularly Saudi Arabia which, even though it is the world's lowest cost producer, needs an oil price of around $25 a barrel to generate the revenues to mollify its young and increasingly radical population.

The country has one of the world's highest birth rates, with half the people aged below 15. Every year a fresh cohort graduates into unemployment or dead end jobs in the bureaucracy, ideal recruits for Islamic fundamentalists.

The ruling Saud royal family - accutely aware that Saudi is a one-commodity economy - knows that a crash in oil prices could have disastrous political consequences at home.

This, ultimately, is the dilemma for the new generation of Opec doves. They have abondoned using oil as a political weapon, and have no intention of slapping boycotts on the US and the UK should the bombs start falling on Baghdad. But if they prove too compliant with America they may find their autocratic regimes under pressure from angry anti-west populations. Even Opec in its 1970s pomp would struggle to fix the oil price in those circumstances.

Opec called an emergency weekend meeting to decide how much more crude to pump to prevent a long-running strike in Venezuela and a looming war in Iraq causing an oil price shock.

The Organisation of the Petroleum Exporting Countries announced it will meet on January 12 in Vienna after a 25 percent rise in prices during November and December.

Kuwaiti Oil Minister Sheikh Ahmad al-Fahd al-Sabah said the cartel was discussing an increase of 1.0-1.5 million barrels per day, a rise of four to 7% on limits now of 23 million bpd.

"There are two proposals. One million barrels per day and 1.5 million barrels a day," the minister told reporters in Kuwait. "We would favour raising by one million and would agree to 1.5 if necessary."

Opec wants to bring prices back inside its $US22-$28 target band, a range it feels does not threaten world economic growth.

"The world has tried everything to boost growth without much success and if oil prices stay high we're in for another year of very slow growth," said Mehdi Varzi of Dresdner Kleinwort Wasserstein.

Expectations for more Opec oil already have knocked prices from their end-December peak of $US33.65 a barrel for US crude, when it was first revealed the cartel was discussing a substantial output increase.

"They're trying to prevent panic on the oil markets. Most in Opec are resigned to a war in the Gulf," said Varzi.

In Wednesday trade, US crude eased another 93 cents to $US30.15 a barrel and London Brent blend shed $US1.08 to $28.25 a barrel.

The cartel's most influential producer Saudi Arabia is pushing for a big increase while most other countries, including Kuwait, Algeria and Libya, prefer an addition of one million barrels daily.

The group, which pumps about 60 percent of world exports, wants to plug a 2.7 million bpd supply gap from Venezuela, where a strike against President Hugo Chavez is in its sixth week.

Loss of Iraqi supplies in the event of a US military attack to oust President Saddam Hussein would remove another two million bpd from the 77 million bpd world market.

"It is a difficult situation we are in, since we are dealing with a market affected by a set of extraordinary circumstances that are beyond our control," said Opec Secretary-General Alvaro Silva.

Many in Opec already are pumping at, or close, to capacity. Only Saudi, the United Arab Emirates, Iran and Nigeria can add volumes among the 11 member group, Varzi said.

Shippers and oil company sources said Riyadh already has lined up more crude sales to the United States, Venezuela's largest customer.

Consumer countries will welcome any action by Opec to stop a rise in energy inflation.

British Energy Minister Brian Wilson said of Opec's plans: "This reinforces my view that there should be no rush to increase pump prices for the motorist." High taxes mean UK motor fuel prices are among the highest in the world.

Source: Reuters

OPEC Secretary General Alvaro Silva-Calderon remained cautious over the Organisation of Petroleum Exporting Countries’ plan to hike its oil output at an extraordinary meeting on Sunday. "Any larger increase or cut in output (than 500,000 barrels a day) has to be carefully evaluated within the prevailing circumstances," Silva-Calderon told the cartel’s OPECNA news agency in Vienna. In March 2000, OPEC agreed to a price band mechanism under which the cartel would raise output by 500,000 barrels per day if prices remain above the range of 22 to 28 dollars for more than 20 consecutive trading days. The mechanism also sets out that OPEC would cut its output by the same amount if prices fell below 22 dollars for 10 consecutive days. On Tuesday the price of OPEC’s reference basket of seven crude oils remained above 28 dollars for the 14th consecutive trading day. If prices continue at these levels, the 20th day will fall on January 15.

OPEC looks set to substantially hike its production at its extraordinary ministerial meeting in Vienna on Sunday, to respond to growing demand sparked by the general strike in Venezuela and the threat of war in Iraq. "It is a difficult situation we are in, since we are dealing with a market affected by a set of extraordinary circumstances that are beyond our control," Silva-Calderon said. Sources close to the cartel have said that Saudi Arabia, the world’s leading oil exporter at some 7.5 million barrels a day, is calling for a total output increase of 1.5 million barrels a day. The Saudi proposal is backed by Qatar, which currently holds the rotating OPEC presidency. The other nine member countries are in favour of a production hike of one million barrels a day, the sources said. OPEC’s current official output quota is set at 23 million barrels a day excluding Iraq.

Oil prices slid on Tuesday after OPEC announced it planned to hike its production levels in order to bring down prices, which had reached particularly high levels in recent weeks. In New York, reference light sweet crude for February delivery dropped by 98 cents a barrel to 31.08 dollars, while the OPEC reference basket of seven crude oils dropped 17 cents to 29.72 dollars. Meanwhile,US oil prices fell again on Wednesday, bringing losses so far this week to over $2 as major producers prepared to make a hefty injection of barrels into the market to compensate for the supply-sapping strike in Venezuela. US light crude dropped 10 cents to $30.98 a barrel, after diving $1.02 in New York on Tuesday and 98 cents a day earlier. Oil hit a two-year peak at $33.65 on December 30.

World crude oil prices have rallied $5 to $6 in the last two months on concerns the Venezuela strike would lead to a supply crunch in the United States. Venezuela supplies about 13 percent of US oil imports. Traders are also worried that the looming threat of war in Iraq could disrupt crude flows from other major producing nations in the Middle East and dent supplies further. Dealers said the additional volumes proposed by Saudi Arabia were larger than expected. They would come on top of official output limits of 23 million bpd agreed by OPEC in December. Most expect an agreement in the range of 1.0-1.5 million bpd, the volume Kuwait’s oil minister, Sheikh Ahmad al-Fahd al-Sabah, says is favoured. Sheikh Ahmad and his Iranian counterpart Bijan Zanganeh are expected to meet in Tehran on Saturday for talks focused on OPEC, a Kuwaiti official said on Wednesday. Another Kuwaiti official said Sheikh Ahmad had not answered OPEC headquarters on whether he would attend a possible emergency meeting on Sunday on a production hike. The Organisation of Petroleum Exporting Countries is considering an emergency meeting on January 12 to finalise the deal. Otherwise matters could be settled by telephone.