Loss in output could cause prices to soar By H. Josef Hebert The Associated Press January 6th, 2003

WASHINGTON -- If the United States invades Iraq, there could be oil shortages and gas lines -- or an oil glut and falling prices.

Much depends on whether American troops can secure Iraqi oil fields and whether other producers continue the flow of oil uninterrupted.

In the growing drumbeat over war with Iraq, the Bush administration rarely mentions oil, even though Iraq has one-tenth of the world’s oil reserves. But a military campaign almost certainly will have a major impact on world markets.

In the event of a war, Secretary of State Colin Powell said recently, "We would want to protect those fields and make sure that they’re ... not destroyed or damaged by a failing regime on the way out the door."

The growing prospect of war, combined with the monthlong political strife in Venezuela that is hamstringing that country’s oil production, already has caused unease among energy traders. Last week, prices for crude to be delivered in February jumped to more than $33 a barrel, 65 percent higher than a year ago. The average price of gasoline has risen steadily to more than $1.40 a gallon. On Dec. 26, pump prices in several cities jumped by as much as 20 cents a gallon overnight.

World oil stocks have been tight and fell sharply last week, the Energy Department says.

"The loss of Venezuelan oil is beginning to hurt," says Robert Ebel of the Center for Strategic and International Studies. "What people are beginning to worry about is, suppose the loss of Venezuelan oil continues when we intervene in Iraq?"

Together, Iraq and Venezuela produce about 5 million barrels a day. Ebel and other energy experts wonder whether increased production from other countries will be able to make up such a shortfall.

With global production at about 76 million barrels daily, a loss of several million barrels could cause prices to soar, economists say. U.S. officials emphasize that oil markets have changed dramatically since the 1970s, when Mideast supply disruptions led to fuel rationing, high prices and long lines at gas pumps.

Nearly 4 billion barrels of oil are in emergency stocks worldwide, including nearly 600 million barrels in a U.S. reserve. If withdrawn at 2 million barrels a day, the U.S. stocks could counter a disruption of 286 days, the administration told Congress this past summer.

"It’s premature to say we’re heading for any price spiral up or down," says Yasser Elguindi, an analyst with Medley Global Advisors in New York. "We have to see what kind of conflict emerges."

Among the scenarios outlined by economists: -- President Saddam Hussein’s government falls quickly, the Iraqi oil fields remain intact and the country’s already dwindling oil exports -- about 2 million barrels a day -- disappear for a few months. Venezuela’s exports resume and other countries, led by Saudi Arabia, boost production to make up any losses.

Prices briefly spike, as they did in the onset of the Gulf war in 1991, to more than $40 a barrel, but within three months recede to normal levels or even lower with supplies plentiful.

-- An invasion meets stiff resistance, Iraqi oil fields are set aflame, production is disrupted elsewhere in the Persian Gulf, global supplies fall by 6 million barrels a day. Emergency stocks cannot close the gap.

In such a case, oil prices could climb to $80 a barrel and stay above $40 well into 2004, halting the U.S. economic recovery and triggering a global recession, according to Ebel, whose group has mapped out a range of scenarios. There is gas rationing and lines at service stations.

George Perry, a Brookings Institution economist, analyzed a similar "worse case" possibility and forecast a potential loss of 7 million barrels a day, a tripling of crude prices and $3 per gallon gasoline.

From all indications, the administration believes Saddam can be toppled without severe impact to oil flow, and some officials have even suggested clear, long-term economic benefit.

With Saddam gone, "you could add 3 million to 5 million barrels of production to world supplies," Larry Lindsey, then Bush’s top economic adviser, said in September, suggesting a successful war "would be good for the economy."

The White House retreated from the comment and Lindsey was later replaced.

Economists agree that a revitalization of Iraq’s decimated oil industry in a post-Saddam, more pro-Western atmosphere, could have lasting impact on global markets.

"A quick victory in Iraq followed by relative stability in the region could lead to increases in oil production capacity in Iraq, Iran and other countries, putting downward pressure on oil prices," Yale economist William Nordhaus recently wrote.

Iraqi oil experts maintain production could reach 3 million barrels a day within a year and double that in a decade -- claims viewed by many as overly optimistic.

"When people talk about Iraq, there are so many unknowns," says John Felmy, chief economist of the American Petroleum Institute. "We haven’t been in the country for years."

It is estimated that it would take billions of dollars to get Iraq’s oil industry into shape where production could be expanded significantly.

Speaker of the Kuwait National Assembly (parliament) Jassem Mohammed Al-Khorafi affirmed Sunday that his country would not be a party in a prospected military strike on Iraq, Kuwait's official KUNA news agency reported.

The speaker denied allegations that Kuwait would cover some costs of the war, saying "we are not a party in this war as we are only parties in the signed security agreements with the states for protection of Kuwait and its stability."

Kuwait is not ashamed of the security agreements it had signed with the United States, Russia, France, Britain and China followingthe 1990 events, Al-Khorafi said, alluding to the unprovoked Iraqi aggression on the oil-rich Gulf state.

He also expressed hope that Iraqi President Saddam Hussein wouldcooperate with the international community, abide by the relevant UN resolutions and maintain his credibility to spare his people andthe region perils of war.

He stressed that Kuwait has taken all necessary precautions in anticipation of the war, which he ruled out, expressing his belief that the current international military buildup in the Gulf would coerce Baghdad to implement the relevant UN resolutions.

The United States has recently intensified its military buildup in Kuwait, one of its close Gulf allies, arousing suspicions that Kuwait will be a key launch pad for a strike against Iraq.

People's Daily Online --- english.peopledaily.com.cn

www.arabnews.com By Mushtak Parker

LONDON, 6 January 2003 — With the threat of war against Iraq looming ominously over the region, and stability continuing to be undermined by the ongoing “war against terrorism”, the Gulf region is faced with a difficult year ahead in 2003.

The cushion of rising oil prices, due to the Iraq crisis and the prolonged strike by oil workers in Venezuela may give a false sense of economic security, underpinned by an immediate upward pressure on crude oil prices in first quarter 2003. By Jan. 1, 2003, the price for Brent blend crude was hovering over the $30 per barrel mark.

External factors apart, countries such as Saudi Arabia are faced with daunting internal economic challenges which are more to do with structural reforms than with the benchmark price of Brent crude.

Reports from Japan suggest that Saudi Aramco plans to cut oil exports to Japan, South Korea and Thailand, its three main Asian customers, in January 2003 by 22 percent. This apparently in line with the new OPEC agreement to cut production to sustain realistic world oil prices and to offset the impact of quota cheating by other countries.

While Asian economies, save Japan, are projected to enjoy the best GDP growth rates in 2003 by far, the impact of the sluggish recovery of the US, European, and Japanese economies may yet burst the projected Asian growth bubble, especially if the US, Europe and Japan sleepwalk into recession. The net impact would be a downward pressure on Asian oil imports.

Economists commend the Kingdom’s recent economic reforms including the adoption of a new foreign investment law; allowing foreigners to own land; and the introduction of a comprehensive privatization strategy. But they agree that the pace of reform has to be much more urgent, and reforms transparent, realistically budgeted, refined, and professionally implemented.

This was also the unequivocal message of the recent International Monetary Fund (IMF’s) Article IV Consultations on Saudi Arabia. The fund in addition recommended removing further barriers to entry, and urgent fiscal transparency and reforms.

At the ‘Future Vision for the Saudi Economy’ symposium organized by the Planning Ministry and the World Bank in October in Riyadh, speakers overwhelmingly acknowledged the problems facing the Saudi economy; the gaps in policy making; and the need for change to meet the challenges of a rapidly growing population, of which some 70 percent is under 25-years-old. In this context, compared to only two years ago, the Kingdom’s business and financial environment has changed significantly for the better.

During 2003, a new insurance law, stock exchange law, and capital markets law, will almost certainly be promulgated. According to Dr. Abdulrahman Al-Jaafary, chairman of the Finance Committee of the consultative Shoura Council, all 67 articles of the draft Stock Market Law, for instance, were debated and approved at end December 2002. A key provision of the new law is the establishment of a Stock Market Commission with judicial powers and reporting directly to the Council of Ministers, the Saudi Cabinet.

However, implementation of new legislation has been erratic in some recent instances. The adoption of compulsory motor insurance from November 2002 was both confusing and shambolic. Is the NCCI (National Company for Cooperative Insurance) the sole provider of the ruksha (insurance) or not? Is the ruksha issued against the driving license, driver, or vehicle? Is the cooperative insurance Shariah-compliant? These are perhaps questions to be answered in a separate analysis, but they were certainly not forthcoming at the time of their introduction. The reality is that Saudi police on the ground are now accepting motor insurance certificates issued by all legal insurance providers, not only NCCI, despite the latter’s earlier pronouncement that it’s ruksha is the only legally acceptable one.

There would be no room for such confusion when the capital markets and stock exchange laws are promulgated. Otherwise it will have the opposite effect and frighten investors and companies away. Without a flourishing capital markets, the growth of the financial services sector in the Kingdom will remain stunted and largely parochial. This in turn will affect the asset quality and product innovation of the sector in the long run.

In the area of foreign investment, while the establishment of the Saudi Arabian General Investment Authority (SAGIA) in April 2000, headed by Governor Prince Abdullah ibn Faisal, has gone some way in making the Kingdom a more investor-friendly environment, the acid test for attracting greater foreign direct investment (FDI) flows are the all-important economic reform package and regional stability.

In the period April 2000 to early September 2001, the value of FDI investments in the Kingdom reached $9.2 billion, according to SAGIA. However, since 9/11, this figure had dropped dramatically to $3.5 billion at the beginning of December 2002. While the fallout of the terrorist attacks in New York and Washington was undoubtedly an important factor, foreign investors continue to be frustrated by the agonizingly slow pace of socio-economic reforms in the Kingdom.

The new foreign investment law, for example, was widely welcomed, but its so-called ‘Negative List’ which stipulated those sectors of economic activity still barred to foreigners, though reviewed and revised a number of times, continues to be a point of friction. Telecoms, insurance, oil exploration, security, retail, education, transport are just some of the 19 economic sectors still barred to foreign investors, and there has been no indication from SAGIA or the Supreme Economic Council of further reforms with respect to the list.

Many bankers and corporates, including some in the Kingdom, would like it to be abolished outright, with the government retaining control through a golden share in strategic sectors such as oil exploration, and perhaps transport.

The Kingdom’s aggressive Saudization policy too is a negative for foreign companies, who prefer to operate in an open labor market, dictated by experience, qualifications, and the rubrics of market supply and demand.

These problems are exacerbated by the poor perception of Saudi workers among both national and expatriate managers; and an over-protective Saudi labor legislation which is a disincentive for foreign firms hiring locals because it becomes almost impossible to terminate the employment of unreliable and inefficient workers. The government to be fair has launched a training and education fund aimed at tackling unemployment.

Another area for urgent reform is that of statistics and information. Very often these are inadequate, non-transparent in terms of collation and methodology, too optimistic, and very poorly disseminated. An open statistical culture is seriously lacking, and this applies in general both to government departments and to private-sector corporates. Of course no one expects companies and agencies to divulge intellectual property, but information as to policy, strategy, performance, terms of trade, indicators and so on, ought to be in the public domain, and should be a right enshrined in law.

The lack of transparency in statistics is underpinned by the generally poor and under-developed corporate communications culture at the agencies and companies. After all, quality, reliable, independent, and up-to-date information is a resource and a vital tool which companies and agencies can use in formulating investment, manufacturing, marketing and other strategies.

Saudi Labor & Social Affairs Minister Ali Al-Namlah, for instance, admitted in October 2003 that “we don’t know the exact rate of unemployment due to the absence of correct information on the number of job seekers and vacant positions.”

Nevertheless, in the Saudi context the minister should be commended for his candour, and has now suggested ways how labor statistics and data could be better collated “by linking all labor offices in the Kingdom with the ministry’s database.”

Unfortunately, that would not suffice, for it is the methodology and criteria for collation that is important. In the UK, for instance, unemployment figures are based on the number of people signing on for benefits and seeking employment at job centers.

There is no distinction between male and female workers, although gender employment analysis can be extrapolated.

In Saudi Arabia this is not possible because there is no benefit system as in the UK. The official government estimate for Saudi male unemployment is 8 percent. However, most bank analysts put the figure at double the official rate at about 16 percent, while others still talk about 25 percent and higher levels of male unemployment.

Because unemployment is a sensitive issue in any economy, a key policy objective is to try to create jobs. In the Kingdom, most Saudis are employed by the state and its utilities. This, together with high defence commitments and the sluggish performance of the non-oil sector, puts pressure on public expenditure, which cannot be sustained through oil revenues only because of their volatility and dependence on world crude oil prices. With the result over the last decade or so, the Kingdom has had almost a persistent budget deficit, forcing the government to borrow more from local banks.

In 2001, for instance, according to the IMF, the Saudi budget showed a deficit of 4 percent of GDP. With the result that the government’s domestic debt increased to a staggering 92 percent of GDP in mid 2001. Only Italy of the G-10 countries has a domestic debt comparable to that of Saudi Arabia.

The Kingdom’s own forecast for this year suggests a smaller deficit for fiscal year (FY) 2002 than the earlier estimate of $12 billion, thanks mainly to rising oil prices. Revenues for FY2002 were projected at $41.9 billion against expenditures of $53.9 billion, but on the basis of an oil price of $16-$17 per barrel. Saudi oil prices have been hovering above the $25 per barrel since August 2002, and last week Brent blend crude prices were quoted at $30 per barrel.

Firmer oil prices into 2003 should mean a knock-on effect on reducing the budget deficit in FY2003. A recent Saudi British Bank study projected oil revenues in 2003 to jump to $54.7 billion. But expenditure too is projected to increase to $58.2 billion.

Increased oil revenues is not a panacea. It depends on how the extra revenues are utilized and whether public spending can be controlled. Any increase in the latter will immediately offset the windfall revenues. Not surprisingly, the IMF has strongly recommended a more efficient use of temporary unanticipated windfall rises in the oil price. Instead of using such revenues through stop-gap measures, it could be invested in a special Saudi Arabia fund to smooth out any budgetary shortfalls on a permanent roll-over basis. Because of non-transparency in fiscal policy, it remains difficult to assess allocation of resources. In fact, the fund rightly calls for government expenditure to be subject to explicitly defined rules and regulations.

In 2002, firmer oil prices will no doubt improve the fiscal situation. The IMF also projects the Kingdom to achieve non-oil GDP growth of 4 percent in 2002. The Saudi British Bank, however, in a recent study, projected that the Kingdom’s non-oil sector GDP growth in 2003 will fall to around 3.5 percent. This on the condition that economic fundamentals such as inflation, trade balance, buoyant oil revenues and good domestic liquidity, remain strong.

There is a clear acknowledgement by Riyadh that dependence on oil and gas for revenues is no longer a sustainable economic strategy. Saudi Finance & National Economy Minister Ibrahim Al-Assaf, speaking at the symposium in Riyadh, concurred that “dependence on oil revenues and consequently public spending as the main driving force for economic activity has made our economy vulnerable to changes in international oil markets. Heavy dependence on a main source of revenue linked to the developments in the world economy and conditions in oil markets constitutes a major challenge to the fiscal policy of the Kingdom.”

Privatization, another potential source of revenue, also is not the panacea that some monetarist economists would like us to believe. It is fraught with both structural, political and market risks, depending on which sector and utility. The slow uptake of the recent Saudi Telecoms (STC) partial sell-off is a poignant reminder of that. It is unlikely that the Kingdom will even contemplate the introduction of marginal income tax. But the pressure may be on to introduce an interim sales tax (VAT) during the coming year.

The economic forecasts for FY2003, in the Saudi context, are not going to change dramatically over the span of one year. It is too short an economic cycle. What the Kingdom needs is a definitive long term plan such as Malaysia’s 2020 Vision, not only for the macro economy, but also for the financial and other sectors.

This would give a clearer timetable and target for the introduction and implementation of reforms.

By William Kay 06 January 2003 20:44

After a meeting in Riyadh yesterday, Saudi Arabia and Russia promised to keep their oil supplies running at a high enough level to prevent a potentially damaging jump in oil prices. This followed a pledge by Opec to increase production by up to a million barrels a day until the price has fallen from its present $30 (£18.75) a barrel to less than $28.

The oil price has risen strongly in recent weeks amid fears that a war in Iraq could disrupt exports throughout the Gulf, compounded by an industrial strike in Venezuela threatening supplies to the US.

"Both [Saudi Arabia and Russia] discussed the importance of stabilising oil prices and the necessity that they don't rise [to such an extent] that they affect global economic growth," said the Saudi oil minister Ali al-Naimi after meeting Igor Yusufov, the Russian energy minister. "The kingdom and Russia agree that co-operation is necessary to ensure that there is no lack of oil supplies." He added that oil markets were in bad shape and all producers had to co-operate to ensure a stable market.

Earlier, the United Arab Emirates oil minister, Obaid bin Saif al-Nasseri, said Opec would raise output if the price of its basket of crude oils remained above $28 until 14 January.

"Opec will increase its oil supply if prices remain above the higher level of the $22 to $28 price mechanism until 14 January. The hike will occur after consultation between members, who will determine the volume," he said, adding that Opec was not bound to increase supply by the 500,000 barrels per day level stipulated in the price band mechanism.

Opec has vowed repeatedly to fill any supply gap created by a possible US attack on Iraq.

Russian oil output is set to rise to an average 8.4 million barrels per day (bpd) this year, 800,000 bpd higher than the average last year. Russia does not belong to Opec.

Analysts say Moscow could easily move to 10.4 million bpd over the next few years and overtake Saudi Arabia, which pumped slightly more than eight million bpd towards the end of 2002.

Opec members are keen not to let Russia increase its market share at their expense.

By William Kay 06 January 2003 20:44

After a meeting in Riyadh yesterday, Saudi Arabia and Russia promised to keep their oil supplies running at a high enough level to prevent a potentially damaging jump in oil prices. This followed a pledge by Opec to increase production by up to a million barrels a day until the price has fallen from its present $30 (£18.75) a barrel to less than $28.

The oil price has risen strongly in recent weeks amid fears that a war in Iraq could disrupt exports throughout the Gulf, compounded by an industrial strike in Venezuela threatening supplies to the US.

"Both [Saudi Arabia and Russia] discussed the importance of stabilising oil prices and the necessity that they don't rise [to such an extent] that they affect global economic growth," said the Saudi oil minister Ali al-Naimi after meeting Igor Yusufov, the Russian energy minister. "The kingdom and Russia agree that co-operation is necessary to ensure that there is no lack of oil supplies." He added that oil markets were in bad shape and all producers had to co-operate to ensure a stable market.

Earlier, the United Arab Emirates oil minister, Obaid bin Saif al-Nasseri, said Opec would raise output if the price of its basket of crude oils remained above $28 until 14 January.

"Opec will increase its oil supply if prices remain above the higher level of the $22 to $28 price mechanism until 14 January. The hike will occur after consultation between members, who will determine the volume," he said, adding that Opec was not bound to increase supply by the 500,000 barrels per day level stipulated in the price band mechanism.

Opec has vowed repeatedly to fill any supply gap created by a possible US attack on Iraq.

Russian oil output is set to rise to an average 8.4 million barrels per day (bpd) this year, 800,000 bpd higher than the average last year. Russia does not belong to Opec.

Analysts say Moscow could easily move to 10.4 million bpd over the next few years and overtake Saudi Arabia, which pumped slightly more than eight million bpd towards the end of 2002.

Opec members are keen not to let Russia increase its market share at their expense.