www.theage.com.au March 22 2003

Oil will always be at centre stage of any conflict in the Middle East, given the West's dependence on it. Barry FitzGerald and Richard Salmons report.

The slogan "No blood for oil" was scrawled in chalk on the pavement outside the Stock Exchange building well before the first missile attacks on Iraq.

Although it reflected the views of ardent anti-war campaigners, many of John Howard's "ordinary" Australians also have a suspicion that the war is really about oil and not an attack to take out a despot in control of weapons of mass destruction.

The conspiracy theorists take things further. Control of Iraq is the first step in a plan by the oil-hungry US to break open the Middle East's stranglehold on the world's biggest oil reserves.

Saudi Arabia will be next, not with bombs but through a US-inspired toppling of the ruling elite.

The result will be the dawn of a golden economic era, one underpinned by abundant and therefore cheap Middle-East oil produced by the US oil majors that also happen to be big supporters of their Texan president.

So the conpiracy theorists would have you believe. It does not matter that cheap oil would destroy the US oil majors or that the cost of the war, variously estimated at $US22 billion ($A37 billion) to $US140 billion, buys a lot of oil any day of the week.

Whether there is any truth to the claims and suspicions about the real reasons for the war will be debated for years to come. Right or wrong, they will not go away, even if Britain's idea of handing control of the Iraqi oilfields to the United Nations once victory by the "coalition of the willing" is secured sees the light of day.

What is known with certainty is that war in Iraq, or anywhere else in the Middle East for that matter, necessarily has oil at, or near, centre stage.

Iraq is, after all, a major, albeit frayed, oil producer and, more importantly in the long run, the owner of the world's second-biggest reserves. It had been producing 2.4 million barrels of oil daily under United Nations supervision since the oil-for-food sanctions came into effect in 1999.

Because of its huge undeveloped reserves Iraq could produce a lot more. But it has not had the capacity to invest in additional production and, technically at least, it remains part of the Organisation of Petroleum Exporting Countries.

OPEC's quota system on production by member countries is aimed at keeping the oil price as high possible without affecting demand. The target is a price between $US25 and $US28 a barrel.

The member countries, whose economies all depend heavily on oil, control two-thirds of the world's reserves, but they produce only one-third of the 78 million barrels of oil that the world gobbles up daily. In effect, the non-OPEC world produces all it can and buys the rest from OPEC.

But OPEC is the producer that can make a difference to the global oil price by adjusting its quotas. That also makes it the producer that can deliver the non-OPEC world a nasty shock every now and then.

Before a shot was fired in the war, Australians got a lesson on the interplay between war in Iraq and what it means for oil prices.

The lesson came at the petrol pump in the form of record prices of more than $1 a litre.

Yet even as petrol stations marked up their boards, analysts were predicting a flood of oil onto the market, as well as a big drop in demand that would ease pressure on prices.

It's early days in the war but the predictions are looking good. Oil prices have crashed from just under $US40 a barrel to $US28 a barrel. The global markets drove up the price on the fear of war and supply disruptions, and they have now taken it down on expectations of the war being short.

That wild swing in attitude highlights the precarious nature of the oil market. Despite being a fuel vital to Western countries, oil is still hugely volatile.

At present, the volatility is to the downside on price. Analysts believe that the start of the war could unlock vast supplies of the resource.

"The consensus is that there will be a correction back downwards but it depends on what kind of inventory comes back on line," said Salomon Smith Barney analyst Gordon Ramsay.

"Stockpiles and reserves will come onto the market, and that will limit the uncertainty. The question is, what do countries have in commercial reserves that have been hidden from official statistics."

Indeed, the oil markets have so far shrugged off concerns of big or long-lasting disruptions. In electronic trading on the New York Mercantile Exchange yesterday afternoon (eastern Australian local time), oil was trading at $US28.30 a barrel, close to a three-month low.

The price was 21 per cent down for the week leading up to the start of the war, again reflecting the belief that a war in Iraq would be quick and that there would be little damage to oilfields and facilities.

The question in the minds of analysts, though, is how much other factors - including additional production, the release of reserves, and falling seasonal demand in the West - will offset a cut in supply from Iraq and squeezes in other OPEC countries such as Venezuela and Nigeria.

Until the commencement of hostilities, Iraq was exporting at a rate of about 1.5 million barrels a day. Saudi Arabia's stockpile could make up for about a month's disruption of those exports, although Saudi officials have said the country does not plan to draw down all 50 million barrels. But Saudi Arabia is now producing about 9 million barrels a day, or about 1.5 million more than its OPEC quota. The country has about 1.5 million barrels of additional production capacity that it can bring on in a few weeks, if the need arises.

The US Government has a strategic reserve of 600 million barrels but has said it wants to rely on OPEC to fill any gap.

In addition, Ramsay noted that Venezuela, which had been the scene of a bitter oil industry strike, was increasing production again. He said output, of 1.6 million barrels a day in January, had reached 2 million by the end of February. Adding further comfort, the arrival of spring and summer in the Northern Hemisphere could reduce demand for oil by as much as 2.7 million barrels a day. In total, private and public oil stocks counted under the auspices of the International Energy Agency officially amount to more than 90 days of imports by Western countries.

Such figures seem to provide a sizeable cushion for any loss of Iraqi supply, but analysts say it will take time for new supplies to arrive, and the conflict comes at a time when Western reserves are at a record low.

Analysts are focused on industry crude oil stocks, which include oil held in refineries, petrol stations and in the supply chain. Such stocks total just 270 million barrels in the US.

www.sunspot.net The Associated Press Originally published March 21, 2003

PARIS -- The International Energy Agency said Friday it sees no reason to release emergency crude oil stocks despite the situation in Iraq and civil unrest in Nigeria.

"There is no event in Iraq that makes us fear about a disruption in oil supply," IEA spokesman Pierre Lefevre said, noting that the output concerned in Nigeria was not significant in terms of volume.

Thursday, soon after the U.S.-led troops launched an invasion of Iraq, the Paris-based energy watchdog said increased production from OPEC kingpin Saudi Arabia and key member Venezuela, combined with lower demand for heating oil in the United States, helped to reinforce confidence that demand would be met.

The IEA has said it will allow the Organization of Petroleum Exporting Countries to have first crack at supplying customers before the IEA takes a decision to release stocks. OPEC has pledged to keep markets well supplied.

Iraq's oil exports through the United Nations' oil for food program, normally around 1.7 million barrels a day, are now virtually at a standstill following the withdrawal of U.N. staff from Iraq on Tuesday.

To date, ethnic clashes in the oil-rich Niger delta in Nigeria have disrupted over 250,000 barrels a day of the OPEC member's 2 million barrels a day output.

Oil price slides despite burning Iraqi wells

www.swissinfo.org March 21, 2003 2:00 PM  By Tom Ashby LONDON (Reuters) - Oil prices have resumed a week-long plunge, bringing the seven-day loss to more than 25 percent, as traders wake up to a glut of OPEC oil arriving in the West as exports dry up from war-torn Iraq. Britain said up to 30 oil wells in southern Iraq had been set alight, but Defense Minister Geoff Hoon said fears that hundreds of wells would be torched have not yet been realised. The fires are a long-term worry for oil markets, but have no immediate impact on supply because Iraq's Gulf exports stopped on Monday and this is already factored into prices, analysts said. "It is the weight of oil, rather than the force of bombs, which is pushing markets lower," said Leo Drollas of London's Centre for Global Energy Studies. "OPEC is now producing more oil than has been lost." Benchmark Brent crude oil fell 42 cents to $25.08 per barrel by mid-morning in London, having touched a three-month low of $24.80. U.S. crude futures also plumbed fresh three-month lows, down 43 cents to $27.69. Oil has lost 26-27 percent of its value in a week. OPEC exporters, especially U.S. ally Saudi Arabia, have hiked output dramatically over the past few months, first to cover a strike in Venezuela and then to cool a price spike since December fuelled by war fears. Drollas said OPEC was now pumping 300,000 barrels per day more oil than it was in November, when Venezuela and Iraq were both pumping at full capacity. "Burning Iraqi oilwells is a longer-term issue for oil markets, but it is neither here nor there for supply now because exports have stopped anyway and this has been factored into prices," he said. SELLOFF Brokers said investors were selling positions built up on futures markets when crude rallied to a 12-year peak close to $40 in late February on anticipation of a war in Iraq. "As the military assault unfolds it will start to determine the final price outcome. The market has now moved from a war premium to a victory discount," said Sydney-based independent oil analyst Simon Games-Thomas. Price hawks in OPEC are already voicing concern about the slump, which is good news for world economic growth but hits revenue for the cartel of mostly Middle Eastern countries. It has also revealed deep splits in the organisation over the war with Iraq. OPEC Secretary-General Alvaro Silva said on Thursday that members have been authorised to use their spare capacity to make up for the shortage of Iraq supply. Iranian Oil Ministry Adviser Hossein Kazempour Ardebili said on Friday any increase in output would be a "violation" since no decision had been taken to raise OPEC quota limits. "The OPEC general-secretary is not authorised to say this and it is OPEC that could decide about it and none of the OPEC ministers approved it," Kazempour told state television. "It is giving a green light to America to launch an attack and none of the OPEC members wants to give a green light to attack another OPEC member," he said. OPEC President Abdullah al-Attiyah said on Thursday the exporter group saw no need to pump more oil into a saturated market. SEIZING OILFIELDS Despite the oil well fires, a British military spokesman said U.S. forces should seize much of Iraq's Rumaila oilfields intact. A Reuters correspondent travelling with the 1st Marine Regiment in southern Iraq reported fires there. The oilfields in southern Iraq, of which Rumaila is the largest with 400 oil wells, pump about half of the country's 2.5 million barrels of daily production. Iraqi Oil Minister Amir Muhammed Rasheed has denied the reports. British troops secured a position on the Faw peninsula on the Gulf, which is a strategic oil export route which connects to Mina al-Bakr and Khor-al-Amaya. Analysts warned that with the U.S. invasion to topple Saddam in the early stages, there remained plenty of opportunity for prices to spike higher again. So far other Gulf producers have reported no disruptions to oil production, nor any disturbances to tanker movements.

Oil prices drop despite fire reports

www.zwire.com By CHRISTINA HOAG, Knight Ridder Newspapers March 21, 2003

As the United States intensified its military assault on Iraq on Thursday, crude oil prices tumbled again to three-month lows in a day of price swings sparked by reports of oil well fires. Crude oil futures sank for the sixth consecutive trading session, to $28.80 per barrel, a slide of $1.08 from Wednesday. But during the day, prices swung between a high of $30.60 and a low of $28, volatility caused by U.S. military reports that three or four oil wells in the southern Iraqi field of Rumaila were ablaze. ''The market is pricing based on a best-case scenario of a pristine military operation by U.S.-led forces,'' said John Kilduff, energy-risk management analyst at Fimat USA. ''But the volatility is incredible.'' Experts warned that although the market still anticipates a quick victory for the U.S.-led coalition, oil field sabotage and shipping lane disruption could easily cause prices to skyrocket. Because of that, motorists will see no immediate relief at the gasoline pump. Miami's average price for regular gasoline remains at a record $1.761, while Fort Lauderdale, Fla., stations on Thursday were averaging just a penny below Wednesday's all-time high of $1.767, according to the AAA auto club. ''Things are looking a lot better,'' said Lawrence J. Goldstein, president of the Petroleum Research Industry Foundation. ''The market is sensing that and we're seeing a reduction in prices, but there will be a lag before we see that in the gasoline on the street.'' Over the past week, the so-called ''war premium'' that has added $5 to $8 to oil prices since last fall has been almost wiped out. Prices have plunged 28 percent since hitting a 12-year high on Feb. 27 of $39.99 despite the loss of almost all Iraqi production of 2.5 million barrels a day. The United Nations shuttered its Food for Oil program Monday. ''The irony of the situation is that Iraq's exports have been cut off,'' said John Kingston, global director of oil for Platts, an energy information provider. A similar price plunge occurred in January 1991 when U.S.-led forces launched air raids on Iraq. Oil plummeted by a third from the pre-war escalation that jacked up prices to $41.15 in October 1990 when Iraq invaded Kuwait. This time around, analysts say other factors besides anticipation of Saddam's easy defeat are softening prices. The market has been reassured by OPEC's pledge to goose output should supplies be disrupted for a prolonged period, and by the extra one million barrels a day from Saudi Arabia. The Saudis also said this week that they are harboring a 50 million-barrel emergency reserve. And both the United States and Europe are showing more flexibility about releasing their strategic supplies. Demand will also start dropping as the Northern Hemisphere moves into spring, and Venezuela's output is ramped up after a crippling workers' strike. In other good news, U.S. crude stocks, which reached record lows as refiners were drawing down inventories rather than buying supplies at a premium price, are also starting to swell, although they remain at uncomfortably low levels unseen since the 1970s. But the rosy picture could dim overnight. Key to keeping the oil market stable is the allied forces' capture of Iraq's oil fields in order to prevent sabotage that could sideline production for an extended period. (EDITORS: BEGIN OPTIONAL TRIM) In February 1991, retreating Iraqi forces set alight more than half of Kuwait's 1,200 oil wells. With that in hindsight, current military plans call for quickly seizing the southern oil area of Basra and nearby port of Umm Qasr. The oil fields lie only 29 miles over the Kuwaiti border. A special ground force has been designated to secure the area. U.S.-led forces hope that a warm welcome from the region's inhabitants will make the job easier. Historically, there has been no love lost between Basra's approximately one million Shiite Muslims and Baghdad's ruling Sunni Muslims. At the end of the Persian Gulf War in 1991, Basra staged an uprising against Saddam. But Basra is a small field. The real prize will be to secure the giant fields surrounding Kirkuk, in a Kurdish stronghold near the Turkish border. With Turkey granting the United States access to airspace alone, ''that will definitely be a trickier proposition,'' Kilduff said. ''There's also some fear that the Kurds might try and claim those fields for themselves.'' Unconfirmed reports state that the Iraqis have already dug a trench around Kirkuk to set oil afire and have planted explosives around oil installations. (END OPTIONAL TRIM) Sabotage outside Iraq is also a threat, analysts said. That danger pervades the Persian Gulf, above all at oil installations and shipping terminals. ''Muslim fundamentalists can do anything to cut off production in another country,'' said W. David Montgomery, energy expert with Charles River Associates in Washington. ''Saudi security is really important, there are a lot of internal threats.''

www.miami.com Posted on Fri, Mar. 21, 2003 BY CHRISTINA HOAG choag@herald.com

As the United States intensified its military assault on Iraq, crude-oil prices tumbled Thursday to three-month lows in a day of swings sparked by reports of fires at oil wells.

Crude-oil futures sank for the sixth consecutive trading session, to $28.61 per barrel, a slide of $1.27 from Wednesday. But prices swung between a high of $30.60 and a low of $28, a volatility caused by military reports that three or four wells in Rumaila, in southern Iraq, had been set ablaze.

''The market is pricing based on a best-case scenario of a pristine military operation by U.S.-led forces,'' said John Kilduff, energy-risk management analyst at Fimat USA. ``But the volatility is incredible.''

Experts warned that oil-field sabotage and shipping-lane disruption could easily cause prices to skyrocket. As a result, motorists are unlikely to see any immediate relief at the pump.

Miami's average for regular gas remained at a record $1.761 Thursday, while Fort Lauderdale stations averaged a penny below Wednesday's all-time high of $1.767, according to AAA.

''Things are looking a lot better,'' said Lawrence J. Goldstein, president of the Petroleum Research Industry Foundation. ``. . . But there will be a lag before we see that in the gasoline on the street.''

Over the last week, the so-called ''war premium'' that had added $5 to $8 to oil prices since last fall has been almost wiped out. Despite the loss of almost all Iraqi production of 2.5 million barrels a day, prices have plunged 28 percent since hitting a 12-year high of $39.99 on Feb. 27. On Monday, the United Nations shuttered its Food for Oil program.

''The irony of the situation is that Iraq's exports have been cut off,'' said John Kingston, global director of oil for Platts.

A similar price plunge occurred in January 1991, when U.S.-led forces launched air raids on Iraq. Oil plummeted by a third, from the prewar escalation that had jacked up prices to $41.15 in October 1990 after Iraq invaded Kuwait.

This time, analysts say, factors other than the anticipation of an easy defeat of Saddam Hussein are softening prices. These include:

• OPEC's pledge to goose output should supplies be disrupted for a prolonged period.

• Saudi Arabia's production of an extra million barrels a day and the fact that the Saudis said this week that they were harboring a 50 million-barrel emergency reserve.

• An increased flexibility on the part of the United States and Europe in releasing their strategic supplies.

• The realization that demand will likely start dropping as the Northern Hemisphere moves into spring.

• The knowledge that Venezuela's crude-oil output is being ramped up following a crippling workers' strike.

• And the fact that U.S. crude stocks, which had reached record lows as refiners drew down inventories rather than buy supplies at premium prices, are starting to swell, although they remain at uncomfortably low levels unseen since the 1970s.

Still, the rosy picture could dim overnight. Key to keeping the oil market stable is the allied forces' capture of the Iraqi oil fields in order to prevent sabotage that could sideline production for an extended period.

In February 1991, retreating Iraqi forces set alight more than half of Kuwait's 1,200 oil wells. With that in hindsight, current military plans call for quickly seizing the southern oil area of Basra and the nearby port of Umm Qasr. The oil fields lie only 29 miles over the Kuwaiti border. A special ground force has been designated to secure the area.

U.S.-led forces hope that a warm welcome from the region's inhabitants will make the job easier. Historically, there has been no love lost between Basra's approximately one million Shiite Muslims and Baghdad's ruling Sunni Muslims. At the end of the Persian Gulf War in 1991, Basra staged an uprising against Hussein.

But Basra's is a small field. The real prizes would be the giant fields surrounding Kirkuk, a Kurdish stronghold near the Turkish border.

And since Turkey has granted the United States access to airspace alone, that, Kilduff said, ``will definitely be a trickier proposition.''