www.nytimes.com March 9, 2003 By DANIEL ALTMAN and NEELA BANERJEE

For months, the Organization of the Petroleum Exporting Countries has scrambled, with little success, to keep a lid on oil prices. With war threatening as the cartel's ministers meet in Vienna this week, prospects for the global economy are so cloudy, analysts say, there is not much left for OPEC to do.

The oil producers are not alone in their plight. Around the world, and especially in the United States, the dilemma of planning for the unknowable is upsetting the decisions of consumers, businesses and investors. That is hampering an economy struggling to better last year's meager growth, weighing on stock prices and subduing consumer spending.

Oil is a significant component of all those calculations. Crude oil prices have hit their highest levels since the Persian Gulf war of 1991, and Standard & Poor's estimates high energy prices have cost the economy $50 billion in consumer purchasing power, or 0.5 percentage point of growth, just since last fall. The Energy Department predicts that by April, consumers will be paying record-high prices for gasoline in much of the country.

In any effort to assess how prices will move — and how the economy will react — the echoes of history are inescapable. Just like in the fall of 1990, the massing of American troops near Iraq and fears that oil supplies from the Persian Gulf will be disrupted have lifted the price of oil well above $30 a barrel for weeks.

But most of the similarities end there, according to industry analysts. While few experts expect a war to lead to shortages of oil, most doubt there will be a replay of the events of the gulf war.

A dozen years ago, analysts noted, the world was awash in oil. Prices were less than $20 a barrel when Iraq invaded Kuwait in 1990. They began to climb when the United Nations imposed an embargo on Iraqi and Kuwaiti oil, removing a bit more than 7 percent of global oil supplies, according to Leonidas P. Drollas, the chief economist with the Center for Global Energy Studies, a London research firm.

Oil prices spiked to more than $41 a barrel by October 1990, but fell once OPEC moved to compensate by increasing production to make up for the loss of the embargoed oil. A few weeks after the United States-led attack on Iraq in January 1991, oil was selling for less than $18 a barrel.

Some traders are positioning themselves for prices to plunge again should the shooting start. "People realize that there is a tremendous downside risk," said Neal L. Wolkoff, the chief operating officer of the New York Mercantile Exchange, where crude oil is traded.

Most analysts say, however, that key indicators of the oil industry's health — notably low inventories of oil and petroleum products at American refineries — suggest that now, prices would remain steep regardless of military action.

A yearlong series of production cuts by OPEC in 2002 gradually reduced global oil supplies as world economies were growing stronger. Then a strike in Venezuela stripped 4 percent of the world's oil supply from the market. So the balance between supply and demand is much tighter than it was on the eve of the gulf war.

Today, a war in Iraq would remove about two million barrels of oil a day from the market, analysts estimate. Some believe that OPEC, which does not disclose its production, has the spare capacity — concentrated in Saudi Arabia — to replace that oil. Others say they think the cartel's members are already pumping at full capacity, both in an effort to keep prices from spiraling even higher, at the risk of stifling demand, and to take advantage of the unusually high prices.

"I think they're effectively tapped out," said Edward L. Morse, executive adviser at the Hess Energy Trading Company. "They're producing very close to as much oil as they can produce."

One step that helped drive prices down once the gulf war began was the decision by the White House to release oil from the Strategic Petroleum Reserve. Lately, the Bush administration has said that it would tap the 600-million-barrel reserve only if supply disruptions occur — not to rein in high prices.

Analysts, oil traders and even some Republican politicians have called on the White House to move more quickly, given the market's jitters. "They must release the oil because there is one fly in the ointment: consumer behavior," said Mr. Drollas of the Center for Global Energy Studies. "If people panic and start filling up their cars, the system will run dry."

Ultimately, the price of oil will likely swing with the progress of a war, industry executives and analysts said. If any fighting ended quickly, prices will probably fall — though not as sharply as in 1991, given generally tight supplies. But if the conflict dragged on, or if oil facilities in Iraq or neighboring countries were damaged, prices could remain high.

Faced with such uncertainty, OPEC will likely do nothing formally when it meets in Vienna, except pledge to continue at high levels of production, analysts said.

"It doesn't matter what they say in Vienna, because OPEC has only one option — that is, provide the barrels that are being asked of them," said Yasser Elguindi, the director of the oil and energy unit of Medley Global Advisors, a New York consulting firm.

The impact of a war on the broader economy is as hard to read as the prospects for oil prices.

If war comes, it could end in anything from quick victory followed by democratic change to chaos and terror worldwide. The rosiest outcome could bolster the United States economy by $50 billion this year, according to a much-cited report by the Center for Strategic and International Studies in Washington, while the worst case could cost $450 billion.

In the meantime, the suspense is taking its toll, said Laurence H. Meyer, the former Federal Reserve governor who wrote the report. "Timing is not unimportant," he said, "because it lengthens the weaker period early in the year and pushes the rebound later in the year."

During the gulf war, the allies' early success briefly emboldened consumers, but there was little of the customary wartime boom. The nation was already in a recession when Iraq invaded Kuwait. By the time President George Bush declared Kuwait liberated, the unemployment rate had already begun its usual postrecession climb and the president's wartime popularity evaporated.

That chain of events fit a timeworn pattern, said Gail D. Fosler, the chief economist of the Conference Board, a business research group in New York. "Whether you're looking at the Arab oil embargo, the Iran revolution that led to the oil shock in the late 1970's or the gulf war, it occurred towards the end of our economic cycle," she said. "You were susceptible, and you got sick."

This time, by contrast, the economy has recently endured recession and, some economists say, may be closer to the start of a new boom.

But the potential side effects of a war could place an unprecedented drag on the economy.

"During the gulf war, you didn't have people being put on heightened terror alerts," Ms. Fosler said. "There's too much emphasis that's put on the war, and not enough emphasis that's put on the terror."

english.eastday.com

OPEC, which pumps a third of the world's oil, may struggle to lower prices from among the highest levels in 12 years as the threat of war with Iraq builds and members near their limit for output.

Ministers at a meeting on Tuesday in Vienna will probably approve a plan backed by Saudi Arabia to pump as much oil as possible should a war disrupt supply from Iraq, the third-largest Middle East producer, officials and analysts said.

Yesterday, Iraq's deputy oil secretary warned that Iraq would take up arms to protect its oil wealth, and predicted that if a U.S.-led invasion begins, the price of oil could reach US$70 a barrel.

Oil prices last week reached the highest since Iraq invaded Kuwait in 1990 and touched US$39.99 a barrel in New York, raising fuel costs and threatening to stunt economic growth. Only Saudi Arabia and the United Arab Emirates have the capacity to refill U.S. inventories, which set a 28-year low last month.

"There isn't enough OPEC capacity to cover the loss of Iraq," said Leo Drollas, deputy executive director of the Center for Global Energy Studies in London, a consulting company founded by former Saudi Oil Minister Sheikh Zaki Yamani. "We're entering a probable war with low inventory cover. Prices could go higher still as the war drums beat louder."

Ten OPEC countries set oil-output quotas as a way to control oil prices and supply, and member Iraq has no quota because its sales are under United Nations oversight. The group raised quotas in January and February after exports from Venezuela were crimped by a strike and a colder-than-normal winter raised demand.

Oil ministers will set policy for the second quarter as analysts expect any U.S.-led attack on Iraq, source of 2.5 million barrels a day or 3 percent of the world's oil, to take place within weeks. Oil demand normally declines after the first quarter because of the Northern Hemisphere spring.

Indonesia's Oil Minister, Purnomo Yusgiantoro, said OPEC should keep quotas unchanged until the group knows the result of the standoff between the U.S. and Iraq. Saudi Arabia, the United Arab Emirates and Kuwait want to raise quotas, he said.

Whether OPEC suspends restraints or not, members are ignoring them. In February, all nations exceeded their output quota except Indonesia and Venezuela, members unable to pump more.

"They already have an informal understanding that everybody should produce as much as they can," said Adam Sieminski from Deustche Bank AG. "Probably the best decision that OPEC could make is steady as she goes."

OPEC's oil production rose 6.3 percent in February, the biggest monthly increase in four years, as output in Venezuela rebounded after the two-month strike and other nations pumped more, a Bloomberg News survey this week showed.

Analysts put OPEC's spare capacity at about 2 million barrels a day, less than Iraq's daily output. Two million barrels is enough to meet daily demand in France, the world's fifth-largest economy.

The situation would worsen should Kuwait close oil fields in the event of war. Kuwait, OPEC's sixth-largest producer in February, said this week it will close all northern oil fields if the U.S. attacks neighboring Iraq to avert damage. The fields produce about 500,000 barrels a day.

(Bloomberg News)

cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 8:33 PM ET March 7, 2003

VIENNA (CBSMW) -- When OPEC meets next week, the countries that produce around 40 percent of the world's oil output will be in a uniquely difficult position if they try to stabilize supplies and prices.

"OPEC has already done most of what it can to maintain price stability," said Jeff Mokychic, head analyst at Bridgeton Global Investor Services. "The market's volatility comes instead from geopolitical fears," he said.

In the past six months, oil futures have risen more than 30 percent and were just shy of $40 a barrel last month -- touching a 12-year high -- as Venezuela's ongoing oil strike and tensions over Iraq dominate the world scene.

That surge came even in the face of OPEC's effort last month to raise its cap on production to 24.5 million barrels a day, up from 23 million barrels.

Indeed, OPEC's output was slightly above that limit in February, but inventories remain at critically low levels, not counting shipments from Iraq, which is barred under sanctions growing out of its invasion of Kuwait in 1990. "OPEC has already done most of what it can to maintain price stability."

Jeff Mokychic, head analyst at Bridgeton Global      At the same time, supplies of U.S. crude stand more than 16 percent below their year-ago level, and last month they fell to their lowest level in more than 27 years.

Distillate supplies, which include heating oil, stand at nearly 26 percent below their level of a year ago and gasoline stocks are almost 6 percent lower year over year. See full story.

Saudi Arabia to the rescue

The only country with the power to put a dent in the tight supplies is Saudi Arabia, the world's largest producer, analysts say.

"The truth is, most members are pumping at capacity already," said Kevin Kerr, a financial analyst at Weiss Research. OPEC has precious little room to maneuver no matter what happens in Iraq."

Saudi Arabia is currently producing around 9 million barrels per day, but has surplus capacity of around 1.8 million barrels to potentially bring that total to 10.5 million barrels per day, according to the Energy Department.

But it "would take some time and considerable investment to get to that level," according to Thorsten Fischer, an oil economist at Economy.com,

Saudi Arabia has kept is promise of keeping the oil markets well supplied, with its current output much higher than the 7.96 million barrels per day February quota bestowed on the world's largest oil producers, the Energy Department said recently.

But even with its spare capacity at fewer 2 million barrels per day, it's still the only OPEC member with a significant amount of extra oil available for the market. Crude "could shoot as high as $50, $65, or even $100 in the months ahead."

Kevin Kerr, financial analyst at Weiss Research      As the weeks wear on, there will be additional output from Venezuela, another 200,000 barrels per day from the United Arab Emirates and maybe another 500,000 barrels per day from Saudi Arabia, "but that's about it," said Fischer.

Given that Kuwait has already said it will shut down about 700,000 barrels per day as a cautionary measure at the beginning of a war, Fischer doesn't see a significant output hike.

Kerr dared to say: crude could jump "as high as $50, $65, or even $100 in the months ahead," even after surging 59 percent in the past year to near $40 a barrel.

Making up for lost oil

As for the meeting itself Tuesday, analysts agreed that OPEC members will more than likely keep their official production limit at 24.5 million barrels per day.

There will be "a silent agreement," however, that Saudi Arabia will produce about 500,000 barrels per day above its quota of 7.96 million barrels per day, said Fischer -- to make up for the shortfall from Venezuela.

Venezuelan production fell to 300,000 barrels per day at the beginning of December from 2.9 million barrels per day earlier that month when workers went on strike in an attempt to oust President Hugo Chavez.

As a result, almost 50 million barrels of oil from world inventories were removed in December, even after accounting for increased supplies from other OPEC producers and reduced consumption in Venezuela, according to the Energy Department. In January, the world lost another 90 million barrels because of the strike. "The only significant influence OPEC has is how quickly they can stop the slide in prices once the Iraqi situation subsides ... something that appears to be a distant event.

Jeff Mokychic      The Energy Department also noted that although Venezuelan production has risen to around 1.2 million barrels per day in early February -- around half its pre-strike level -- the strike among oil workers continues.

So when it's all summed up, actual OPEC member production will be higher, but will either match or fall short of being able to cover for lost oil supplies in the event of a war, according to Fischer.

"The only significant influence OPEC has is how quickly they can stop the slide in prices once the Iraqi situation subsides," said Bridgeton Global's Mokychic -- something that "appears to be a distant event." Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.

www.upi.com From the National Desk Published 3/7/2003 5:48 PM

NEW YORK, March 7 (UPI) -- Crude prices took another strong step higher Friday, reaching a 12-year high on the New York Mercantile Exchange after the United States and Britain called on the United Nations to give Iraq only 10 more days to fully disarm.

April NYMEX crude futures tested the $38 per barrel level before stepping back and settling 78 cents higher on the day at $37.78 per barrel as traders appeared unwilling to be caught short in the event the situation deteriorated further over the weekend.

The bullishness of recent months continued Friday as the market digested the uncompromising tone of President Bush's Thursday night news conference, which was followed up by the allies' proposal to the U.N. Security Council that Iraq be fully stripped of its weapons of mass destruction by March 17.

"The Security Council has to give a clear message that the time has come to stop playing hostage to those who...mistakenly interpret our aspiration to peace as a sign of weakness," British Foreign Minister Jack Straw told the Security Council. "We have to put pressure on Saddam Hussein. We have to put this man to the test."

The test would come in the form of blitz by American and British forces into Iraq, which holds the world's second-largest oil reserves and also, allegedly, weapons of mass destruction that Baghdad is prohibited from possessing.

The St. Patrick's Day deadline is on a Monday while trading on the April contract concludes Friday March 21, leaving traders roughly a week to get their books for the month balanced before the April market is finalized.

France has vowed to block any U.N. resolution authorizing force to settle the matter, however Bush has indicated he will not be stalled or dissuaded from launching the attack if Iraq's chemical, biological and possibly nuclear arsenal is not promptly dismantled.

The turmoil comes at a time when the United States continues to have relatively low supplies of crude on hand. The low crude supplies, coupled with refineries being off-line for annual maintenance, have translated to higher prices throughout the refinery stream.

April NYMEX heating oil moved a hefty 5.29 cents higher to $1.1085 per gallon as cold weather continued and demand for heating oil in Europe reportedly picked up. Gasoline for April also gained more than 5 cents Friday to settle at $1.1567 per gallon.

The retail gasoline price paid by consumers limbed more than 2 cents to a nationwide average price of $1.686 per gallon for regular and Californians are paying more than $2.00 per gallon in most areas prompting a call Thursday for a federal investigation by Sen. Barbara Boxer, D-Calif.

"Even with a substantial increase in crude oil imports from Venezuela, there was still not enough crude oil in the petroleum system to build both crude oil inventories, as well as product inventories," the U.S. Energy Information Administration said in its weekly petroleum summary. For both crude oil inventories and product inventories to return to more normal levels, crude oil imports will need to continue to rise over the next several months."

(Reported by Hil Anderson, UPI Chief Energy Correspondent)

ogj.pennnet.com Sam Fletcher Senior Writer

HOUSTON, Mar. 7 -- Futures prices for oil and petroleum products advanced Thursday as traders awaited a television press conference by President George W. Bush, scheduled after the close of trading sessions.

During his news conference, Bush said he would ask the United Nations Security Council for another vote next week on whether to declare Iraq in violation of arms restrictions. He again indicated that the US might take action even without UN approval.

The April contract for benchmark US light, sweet crudes gained 31¢ to $37/bbl Thursday on the New York Mercantile Exchange, while the May contract increased by 58¢ to $35.54/bbl. Heating oil for April delivery jumped by 1.17¢ to $1.0556/gal. Unleaded gasoline for the same month was up 0.51¢ to $1.106/gal.

Venezuela production Meanwhile, Venezuelan Energy Minister Rafael Ramirez said his country soon would be producing 2.8 million b/d of oil, its production quota assigned by the Organization of Petroleum Exporting Countries.

In an interview with state news agency Venpres, Ramirez said, "We are sure that we are going to recover national production during the first half of this month to its normal level of about 3 million b/d, which will allow us to reestablish the production quota set by the organization.

He said, "We are recovering our oil production in a sustained fashion. Currently, it is above 2.5 million b/d and within hours will be at 2.8 million b/d, which means that we will be at the required level for the internal market, where gasoline production is at 60%, but additionally will allow us to strengthen exports."

However, the US Energy Information Administration this week estimated that Venezuela's oil production could increase to 1.8 million b/d by the end of this month, up from a production average of 1.4 million b/d in February.

EIA also predicted that OPEC might suspend production quotas for its other members if military action disrupts Iraq's oil production.

Iraqi production UN officials meanwhile reported Iraq's oil exports increased to 1.9 million b/d during the week ending Feb. 28, up from 1.7 million b/d the previous week under the UN supervised oil-for-aid program. The price for that oil also increased by 15¢ to $28.70/bbl.

However, the 4-week average for Iraqi oil exports fell to 1.73 million b/d, officials said.

Due to a cumulative shortfall of $4.5 billion in Iraq's oil revenue, largely as a result of self-imposed stoppage of oil exports during disputes with UN officials, 2,389 humanitarian supply contracts have been approved by the UN but remain unfounded.

Other prices The April contract for natural gas lost 17.7¢ to $6.84/Mcf Thursday on NYMEX. That market "remains perched on the edge of winter, with continued cold in the Northeast and thinning storage levels holding up next-day cash prices.

"But traders expect to see short covering today ahead of the weekend and a possible war on the horizon," analysts at Enerfax Daily reported Friday. That buying might bring the April gas contract back above $7/Mcf, they said.

"Meanwhile, despite the strength in natural gas prices, we do not expect a significant up tick in US LNG imports near term, due primarily to the limited availability of LNG tankers for spot trade," said Robert Morris, Salomon Smith Barney Inc., New York, in a report Thursday.

US imports of LNG have been limited also by recent shutdowns of nuclear plants in Japan after Tokyo Electric Power Co. admitted to falsifying maintenance reports at its nuclear plants. Authorities ordered all 17 of the company's nuclear plants to be shut down by April for inspections; 13 have already shut down.

In London, the April contract for North Sea Brent oil gained 53¢ to $33.53/bbl Thursday on the International Petroleum Exchange. The April natural gas contract, however, lost 4.4¢ to the equivalent of $2.93/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes gained 21¢ to $32.50/bbl Thursday. Contact Sam Fletcher at samf@ogjonline.com