straitstimes.asia1.com.sg

NEW YORK - The most common cause of recessions - a surge in oil prices - is again afflicting the global economy.

Just as they have before every American downturn over the last 40 years, energy costs have risen significantly in the last year, capped by a sharp spike since December.

With more money being spent on petrol and heating fuel, economic growth has slowed in both the United States and Europe, and the uneven recovery that began in late 2001 is facing perhaps its biggest threat yet.

Most forecasters expect the US economy to avoid a new recession this year, saying that only an unexpectedly protracted war in Iraq would keep oil at its current price or higher.

But any war is an unknown, and the price increases for both oil and natural gas have already caused consumers to cut back on other spending.

The increases have also created a new problem for businesses trying to emerge from the hangover of the late-1990s boom.

'The economy is extremely fragile,' said Mr Mark Zandi, chief economist at Economy.com, a research company in West Chester, Pennsylvania. 'We've got some real problems if this drags on for any length of time.'

Energy costs began rising more than a year ago, when the Organisation of Petroleum- Exporting Countries cut production in response to the weak global economy.

The potential war in the Persian Gulf, political chaos in Venezuela and a cold winter in the United States caused the price of a barrel of oil to soar to almost US$40 (S$70) last Thursday, the highest since Iraq invaded Kuwait in 1990, before retreating to US$36.60 last Friday in New York. That is about 69 per cent higher than it was a year ago.

Every time the oil prices have risen by at least 60 per cent since World War II, a recession has occurred in the US, with the exception of a one-month blip in oil prices in 1987.

The current annual increase is similar in size to the jumps of late 1990, when a recession was starting, and the summer of 2000, nine months before another began.

Higher energy costs reduce economic growth by effectively forcing families and businesses to send more money to a small number of oil-producing countries, leaving less to be spent on goods and services that create jobs at home.

Energy prices affect Europe and Japan even more severely than the United States, which produces more of its own oil and natural gas.

Britain reported last week that its economy had grown at the most sluggish pace in 10 years during the last three months of last year. The German economy shrank at the end of last year for the first time in a year.

'The single best cyclical indicator for the world economy is the price of oil,' said economist Andrew Oswald at the University of Warwick outside Coventry, England. 'Nothing moves in the world economy without oil in there somewhere.'

In 1990, oil prices fell almost as soon as the US attacked Iraq, and many economists think the same thing could happen this year.

Even if a war temporarily reduced the supply of energy, President George W. Bush could release oil from the nation's Strategic Petroleum Reserve to bring down prices, analysts note.--New York Times

www.alertnet.org 06 Mar 2003 18:32

WASHINGTON, March 6 (Reuters) - Spare world oil production capacity, excluding Iraq and Venezuela, may be as low as 1.5 million barrels a day (bpd), leaving little room for other countries to make up Iraq's lost oil exports if the United States were to attack the country, the U.S. Energy Information Administration said on Thursday.

OPEC is pumping at almost full production, with output averaging 24.5 million bpd in February, to offset the disruption in Venezuela's oil exports due to a workers strike and to get ready for the potential cutoff in Iraq's oil shipments in a war, the EIA said in its monthly energy outlook.

Even if the situation in Venezuela and Iraq are resolved without further oil disruptions, the additional pressure on commercial oil inventories of industrialized nations since early December will likely cause oil stocks to remain near the lower end of the 5-year average through most of 2003, EIA said.

"Months may also be needed to reach full Venezuelan production levels, resulting in new 5-year lows in (industrialized nations') commercial inventories in the second quarter," the agency said.

www.theage.com.au March 7 2003 By Grace Nirang Jakarta

OPEC should keep its production quotas unchanged until the producer group knows the result of the confrontation between the United States and Iraq, says Purnomo Yusgiantoro, Indonesia's Energy Minister.

The Organisation of Petroleum Exporting Countries, which meets on Tuesday to discuss production policy, should wait to see the effect on oil prices of US military action in the Middle East before deciding whether to change quotas, he said.

Saudi Arabia, the United Arab Emirates and Kuwait wanted to increase quotas.

"We want OPEC not to make any decision, especially on quotas, because the situation is very uncertain at the moment," Mr Purnomo said.

Ten OPEC members, all except Iraq, are responsible for setting output quotas to control oil prices and supply. The group raised quotas twice this year in a bid to meet the shortfall from Venezuela and would probably leave them unchanged next week, OPEC secretary-general Alvaro Silva said.    advertisement       advertisement

Oil prices in New York have risen 18 per cent this year to $US36.80 a barrel after industrial action in Venezuela cut supplies, and on concerns that the US will attack Iraq.

Mr Purnomo said Saudi Arabia, the UAE and Kuwait had promised to make up any shortfall in case of a war.

"Those countries have stated that they are ready to fill the shortage from Iraq if war breaks out," he said. Mr Purnomo said OPEC should suspend its target range of $US22-$US28 a barrel, which has become unworkable because of the war threat.

OPEC has an informal agreement to raise production should its benchmark oil price remain above $US28 a barrel for 20 consecutive trading days, or lower it should the price stay below $US22 a barrel for the same period. The benchmark oil price has been at $US32.12 a barrel this week and has not gone below $US28 a barrel since December 13.

www.msnbc.com

LONDON, Mar. 6 — World oil prices rose towards historical highs on Thursday as the United States suggested that Iraq may have only days to decide to disarm or face war.

• Oil after Saddam: All bets are in • A Russian-American pipe dream • Iraqi oil, American bonanza • The Saudis: Between Iraq and ... • U.S. politics: Is the fix in?        

FUTURES TRADERS fear an attack on the world’s eighth largest oil exporter could trigger a supply shock at a time when global inventories are at historical lows.        U.S. crude, which hit a 12-year high around $40 last week, was 31 cents higher at $37.00. International benchmark Brent crude oil rose 51 cents to $33.51 per barrel, barely 40 cents below a two-year high hit last week.        “There are certainly a lot of people who think the likelihood of a military operation before the end of March is high,” said Adam Sieminski of Deutsche Bank investment bank.        U.S. Secretary of State Colin Powell sought to blunt opposition to war by arguing that Iraqi President Saddam Hussein had not made a decision to disarm.        “Nothing we have seen... indicates that Saddam Hussein has taken the strategic and political decision to disarm,” he said in a speech on Wednesday.        “We will see in the next few days whether or not he understands the situation he is in and he makes that choice.”        Chief United Nations weapons inspector Hans Blix is due to deliver his next report on Friday, and the United States wants the Security Council to vote on a war mandate next week.

Gas prices climb on fears of war with Iraq March 6, 2003 — Consumers are growing worried as gas prices continue to climb. NBC’s Jim Cummins reports, and Tom Kloza of the Oil Price Information Service tells ’’Today’s’’ Katie Couric what market forces are at work.         POWELL VS. BLIX        Powell’s harsh assessment of Iraqi cooperation contrasted with comments by Blix, who said Iraq had stepped up disarmament recently.        Blix said he would release “benchmarks” for disarmament on Friday, but Powell resisted the idea saying: “We’ve given him enough measures... I think we can pretty much judge now that he is not complying.”        Washington and London have about 300,000 troops in the Gulf ready to attack Iraq for allegedly hiding programmes to develop nuclear, biological and chemical weapons.        The threat to Gulf oil supplies comes at a time when global oil stocks have slumped below normal levels because of a prolonged strike in exporter Venezuela, and an unusually cold winter in the northern hemisphere.

   Latest U.S. government data show stocks of distillates, including heating oil, falling to the lowest level since 1963 on strong winter demand.

       Crude stocks in the world’s largest consumer are already at their lowest in 27 years.        Fears of war and a supply crunch have sent world oil prices up by a third in the last three months, driving up energy costs at a time of fragile growth in many rich economies.        The Organization for Economic Cooperation and Development, which represents most major industrialised nations, said on Thursday the world economy would be hit if the Iraq crisis led to a sustained period of high oil prices.        The Organization of the Petroleum Exporting Countries, which controls two-thirds of world exports, has pledged to fill any shortfall should war disrupt supplies from Iraq, which now sells around two million barrels daily.        But industry analysts say OPEC may not have enough to cover if war on Iraq also affects supplies from other Gulf countries, and importing countries may have to fall back on their huge emergency stockpiles to fill the gap.

  More Oil & Energy news •  Oil spill industry on Iraq standby •  Dousing the flames of an Iraqi war •  Gas prices set to hit record highs •  Saudi, IEA agree to tap OPEC first •  OPEC likely to suspend quotas

reuters.com Thu March 6, 2003 07:47 AM ET By Peg Mackey

DUBAI (Reuters) - As war clouds darken over Iraq, oil markets are obsessing over whether or not OPEC is able to cover a supply crunch and prevent the need for consumer countries to tap emergency strategic reserves.

Optimists say the producer group will be able to shoulder the supply burden alone because the world's thirst for oil will ease during spring.

"OPEC will have more than enough capacity to cover a loss in Iraqi exports plus a small outage in Kuwaiti supplies," said Gary Ross of New York consultancy PIRA Energy.

"That's because the excess capacity of Saudi Arabia and the UAE will combine with a seasonal decline in oil demand of 2-2.5 million barrels per day in the second quarter."

Pessimists, however, say oil markets will remain unconvinced in the stressful early days of battle.

And world consumers have cause for concern if they look only at the spare capacity figures of the Organization of the Petroleum Exporting Countries.

Two output increases this year to cover shortages from strike-hit Venezuela have left the cartel with a cushion of just two million bpd, a Reuters survey estimates. That is just enough to cover a break in Iraqi oil exports.

"OPEC is very close to its immediate full capacity," said Leo Drollas of London's Center for Global Energy Studies (CGES).

"And if Kuwait shuts its northern fields they may not have more than one million bpd to put on the market to cover for Iraq -- and that is not enough."

Iraq's Gulf neighbor Kuwait has said it could shut up to a third of its 2.1 million bpd of output as a safety precaution when the bombs start dropping.

STRATEGIC RESERVES

That stoppage would make it more difficult for OPEC to handle a shortage and make more likely the release of emergency reserves held by industrialized importers.

If OPEC has insufficient spare, those countries, represented by the Paris-based International Energy Agency (IEA), have said they will release crude from strategic inventories for the first time since the 1991 Gulf War.

"The IEA should release oil to prevent prices spiking," said Drollas. "They should have done it when Venezuelan exports were interrupted. And if they don't do it with Iraq, they should disband the IEA."

OPEC is doing its utmost to avoid a repeat of the Gulf War when the IEA released crude to coincide with the allied attack on Iraq, triggering a huge drop in oil prices.

Cartel officials have vowed the group will pump flat out if a war halts Iraqi exports. The head of the IEA, Claude Mandil, has met with Saudi Oil Minister Ali al-Naimi and OPEC Secretary-General Alvaro Silva.

Saudi Arabia will press OPEC, at a meeting next week, to set up a contingency for war that would suspend output quotas once hostilities start.

The only OPEC producer with any significant spare capacity it will be down to Riyadh to determine how many extra barrels are released into world markets.

Saudi Oil Minister Ali al-Naimi has said the kingdom is able to boost flows to 10 million bpd and can sustain maximum capacity of 10.5 million bpd within months.

"It has never been a problem to get to 10 million bpd. We've been there before," said a senior Saudi oil executive. "And pumping beyond that is within the range of our production capacity."

The Saudi executive said much of the kingdom's spare volume is located offshore in the northern Gulf fields of Zuluf, which pumps Arab Medium, and Safaniyah, which produces Arab Heavy.

Several other fields could also be tapped for extra oil.

The kingdom, the world's biggest oil exporter, now is pumping at just over nine million bpd, insiders say.