www.theage.com.au March 4 2003 By Alex Lawler London

OPEC, supplier of a third of the world's oil, may struggle to replace output from Iraq should the nation's exports be halted through war because most members are already pumping near their limit, analysts said.

Oil prices have surged 63 per cent in the past year and last week approached $US40, the highest price since the Gulf War, after US inventories fell to some of the lowest levels in three decades. Should an attack disrupt Iraqi supply, oil importers will have to tap emergency reserves to prevent soaring prices, analysts said.

"The problem is OPEC is getting close to the limit of what it can do," said Julian Lee, a senior analyst at the Centre for Global Energy Studies in London. "Prices aren't going to come down much until US inventories start to rise."

Analysts put OPEC's spare capacity at about 2 million barrels a day, equal to 2.6 per cent of world output and less than Iraq's daily output of 2.5 million barrels. Two million barrels is enough to meet daily demand in France, the world's fifth-largest economy.

OPEC members, except Iraq, agree to restrain oil supply to boost prices. The group raised quotas twice this year to fill a shortage caused by a strike in Venezuela.

In 2000, OPEC neared the limits of its spare capacity after the group raised production quotas and US prices surged to more than $US37 in September of that year. The present situation was similar, analysts said.

The US and other industrialised countries hold inventories to alleviate supply shortages, to avert a repeat of the shortages during the 1973 Arab oil embargo. US Energy Secretary Spencer Abraham has said the nation may use its 600-million-barrel reserve to offset any "severe" disruption in supply.

A recovery in OPEC's oil capacity depends in part on Venezuela. Production there has risen to 2 million barrels a day, the Government said, but that is still only two-thirds of output in November.

OPEC has no consensus on what steps to take on March 11, when oil ministers meet in Vienna to set policy for the second quarter. At that time, oil demand normally slows because of the northern hemisphere spring.

OPEC secretary-general Alvaro Silva said supply was equal to demand, while oil officials from Kuwait and Qatar said last week the group might raise output. Other officials have said output quotas will be lifted should Iraq's exports be cut off.

JP Morgan estimates OPEC could muster another 2 million barrels a day, from Saudi Arabia and the United Arab Emirates.

"OPEC is irrelevant at the moment," said Lawrence Eagles, an analyst at GNI-Man Financial in Belfast, Northern Ireland. "Now, there's only one country that counts, Saudi Arabia."

Saudi Arabia might already be pumping 9 million barrels a day, analysts said. The kingdom, which doesn't disclose its production, says it can raise output to 10.5 million barrels a day within 90 days.

The International Energy Agency was likely to tap inventories in the event of a war on Iraq, the group's executive director said last week. The IEA co-ordinates the use of government oil reserves in the US and 25 industrialised nations.

A stockpile release was "likely but not certain" should Iraq be attacked, the agency's executive director, Claude Mandil, said in London.

-Bloomberg

www.smh.com.au March 4 2003

OPEC, supplier of a third of the world's oil, may struggle to replace output from Iraq should that nation's exports be halted by a war because most members are pumping near their limit, analysts said.

Oil prices have surged 63 per cent in the past year and last week approached $US40, the highest since the 1990-91 Gulf War, after US inventories fell to among the lowest level in three decades. Should an attack disrupt Iraqi supply, oil importers will have to tap emergency reserves to prevent soaring prices, analysts said.

"The problem is OPEC is getting close to the limit of what it can do," said Julian Lee, a senior analyst at the Centre for Global Energy Studies in London, a think tank founded by former Saudi oil minister Sheikh Zaki Yamani. "Prices aren't going to come down much until US inventories start to rise."

Analysts put OPEC's spare capacity at about 2 million barrels a day, equal to 2.6 per cent of world output and less than Iraq's daily output of 2.5 million barrels. Two million barrels is enough to meet daily demand in France, the world's fifth-largest economy.

OPEC members, except Iraq, agree to restrain oil supply to boost prices. They increased quotas twice this year to fill a shortage caused by a strike in Venezuela and after a colder-than-normal winter boosted demand for heating fuel.

In 2000 OPEC neared the limits of its spare capacity after the group raised production quotas and US prices surged to more than $US37 in September of that year. The present situation is similar, analysts said.

"If war starts with Iraq, there will have to be a significant release from the strategic reserves in the US to avoid an economic catastrophe," said Adam Sieminski, an oil strategist at Deutsche Bank.

The US and other industrialised countries hold inventories to alleviate supply shortages, reserves built to avert a repeat of the shortages seen during the 1973 Arab oil embargo. US Energy Secretary Spencer Abraham has said the nation may use its 600 million-barrel strategic reserve to offset any "severe" disruption in supply.

A recovery in OPEC's oil capacity depends in part on Venezuela. Production in the South American country has risen to 2 million barrels a day, the Government said. That is still two-thirds of output levels last November.

No consensus has emerged from OPEC on what steps to take on March 11, when oil ministers meet in Vienna to set policy for the second quarter. At that time, oil demand normally slows because of the northern hemisphere spring.

"We acknowledge that there's a shortage in the US," said OPEC President Abdullah bin Hamad al-Attiyah, who is also the oil minister for Qatar. "There's a lot of oil in the middle of the sea heading to the Gulf coast and we are still not sure yet whether that will be sufficient."

OPEC Secretary-General Alvaro Silva said current supply was equal to demand, while oil officials from Kuwait and Qatar said last week the group may raise output. Other officials have said output quotas will be lifted entirely should Iraq's exports be cut off.

JP Morgan Chase estimates OPEC could muster another 2 million barrels a day, largely from Saudi Arabia and the United Arab Emirates.

"OPEC is irrelevant at the moment," said Lawrence Eagles, an analyst at GNI-Man Financial in Belfast, Northern Ireland. "Now, there's only one country that counts, Saudi Arabia."

Saudi Arabia may already be pumping 9 million barrels a day, Mr Eagles and other analysts said. The kingdom says it can raise output to 10.5 million barrels a day within 90 days.

The International Energy Agency is likely to tap inventories in the event of a war on Iraq, the group's executive director said. The IEA coordinates the use of government oil reserves in the US and 25 industrialised nations.

A stockpile release is "likely but not certain" should Iraq be attacked, the agency's executive director, Claude Mandil, said. He was "confident" OPEC would be first to take steps by raising output.

Bloomberg

news.ft.com By John Tatom Published: March 3 2003 4:00 | Last Updated: March 3 2003 4:00 From Prof John A. Tatom.

Sir, Martin Wolf ("Stable oil supplies are worth defending from Iraqi aggression," February 26) reviews seven oil-related reasons for an attack on Iraq and rejects six of them. He suggests, however, that ensuring the stability of the Gulf oil supply is plausible: "How far Mr Hussein is a threat to security in the Gulf is debatable; but that securing stability of supply is a legitimate objective is not." I submit that the reverse is true.

The stability of the flow of Middle East oil has never been a reasonable military objective and is not now. It was not reasonable in 1973, when a brief Opec embargo sent oil prices soaring, and it was not subsequently, when Opec held up oil prices. Military intervention was also not a plausible response when Iraq's attack on Iran reduced that flow and sent oil prices up further in 1979-81 and kept them higher until 1986. The recent strike in Venezuela disrupted oil supplies temporarily but that also was not a cause for war. In the end, stability of an oil flow could not be assured by military action in any case.

The stability of long-term supply relies on competition and multiple producers and sellers of oil. It is against an oil owner's self-interest to forgo net revenue from oil production. Withholding oil artificially can even permanently impair the ability to recover reserves from an oil pool. Who controls the oil reserves in the Middle East should not be expected to affect production or price.

There is little that can be done to eliminate the risk of short-term disruptions, such as strikes or natural disasters. A military campaign cannot make more oil available. Long-term use of military force to secure production over a century or more is too extreme a commitment for a nation's military to carry out successfully. Markets ensure the stability of market supply and price. Governments do not and cannot do so.

Saddam Hussein's declared intention when he invaded Kuwait was to create (and control) an empire stretching from Morocco to Indonesia. He did not repudiate this goal in the ceasefire agreement or subsequently. Even if he were successful, he would not have any incentive to attempt to alter the supply or pricing of world oil. Instead, he threatens the political stability of an extensive region, comprising a large share of the world's population.

This is the dictator who launched a war against a neighbour with about three times the population and income of his country and prosecuted it for nine losing years, only to attack a much smaller but richer neighbour. Mr Hussein threatens the world and, first of all, his neighbours and the US, not the stability of oil supply.

John A. Tatom Department of Economics DePaul University Chicago, IL 60604, US

www.forbes.com Reuters, 03.03.03, 2:57 AM ET

SINGAPORE, March 3 (Reuters) - Oil prices fell again on Monday as the timetable for a war in Iraq appeared to get pushed back with Baghdad complying with U.N. demands to destroy illegal missiles, while Turkey rejected hosting U.S. troops on its soil. U.S. light crude fell 50 cents to $36.10 a barrel, extending Friday's 60-cent loss in New York. "The pendulum of market sentiment appears to be focused on a delay to a military strike, which will erode the war premium," said Sydney-based independent oil analyst Simon Games-Thomas. "Without the war factor and against a backdrop of low inventory and the loss of Venezuelan production, a fair value for crude is somewhere in the region of $30-$32." Crude has fallen sharply after briefly touching $39.99 on February 27, which was just short of a $41.15 record struck in October 1990 in the build up to the Gulf War. Washington's continued talk of an invasion to disarm Iraq of weapons of mass destruction and wafer-thin winter heating fuel stocks in the United States as temperatures remain unseasonally low bolstered prices to 12-year highs last week. But Iraq's compliance to destroy its al-Samoud 2 missiles as ordered by chief U.N. weapons inspector Hans Blix and calls from France and Russia for a peaceful solution to the crisis have taken some of the steam out of the prospects for imminent war. Last week analysts pegged the so-called war premium at between $2 and $6 a barrel, with traders fearing an attack on Iraq, the world's eighth biggest oil exporter, could disrupt crude supplies from other Middle East producers. OPEC President Abdullah al-Attiyah said on Monday that oil prices were currently carrying a war premium of about $5. Attiyah, also Qatari oil minister, said the producers' cartel would suspend its oil output limits if a war were to halt Iraqi exports, which are roughly two million barrels per day. Asked in an interview on BBC television if OPEC would remove its production ceiling if a U.S.-led attack were to disrupt Iraqi oil supplies, Attiyah said: "Yes. If there is a shortage and the world needs more oil, we will do it...We will pump maximum capacity if the market needs it." The Organisation of the Petroleum Exporting Countries is expected at a March 11 meeting to establish a war contingency plan that would suspend limits once hostilities start. Kuwait was swift to lend its support to a temporary suspension of the group's ceiling -- lifted twice already this year to 24.5 million bpd to cover a shortfall from strike-bound member Venezuela. "Whatever OPEC will decide, Kuwait will cooperate," Kuwaiti Oil Minister Sheikh Ahmad al-Fahd al-Sabah told Reuters.

TURKEY REJECTION Turkey's parliament threw a spanner in U.S. war plans and narrowly voted at the weekend against allowing the deployment of U.S. troops on Turkish soil, from which Washington hoped to open a northern front against Iraq in any war. The United States had offered Ankara up to $30 billion in grants and loan guarantees to shore up its frail economy for the deployment of U.S. troops. Turkish leader Tayyip Erdogan said on Sunday the government would review its options and did not rule out a second attempt to win permission from parliament. Iraq scrapped two batches of its al-Samoud 2 missiles at the weekend and opened talks on VX nerve gas and anthrax stocks it said it had destroyed. The United States has accused Baghdad of playing a "game of deception" and hiding banned weapons.

www.pressherald.com Sunday, March 2, 2003 By WAYNE M. O'LEARY,

ABOUT THIS SERIES This is another in a series of guest commentaries that examine the forging of public policy in the nation's capital.

Wayne O'Leary is an Orono writer specializing in politics and economics.

Since the very beginning of the Bush administration's excellent adventure in Iraq, even in the dreaming and planning stages, the old, nagging question was around, insinuating itself into the public consciousness: Is it really about oil?

Many think so. The Arab "street" is convinced, and so are millions in the allied Western countries, whose leaders nonetheless give lip service or grudging support to America's obsession with eradicating Saddam Hussein. In America itself, the question is repeated with increasing intensity as the Mideast troop buildup proceeds apace. It underlies every debate about the looming conflict; it is the great unanswered, the elephant in the room.

So, is it, in the end, about oil? Well, not entirely. The manic look in the eyes of George W. Bush, his obvious agitation when Saddam's name comes up, strongly suggest that this has become for him a personal matter, a point of honor, a grudge match that must be settled; psychologically, the president can't not go to war. More than that, the leadership position of the United States as the world's only superpower has been placed on the line; empires can't back off, or they lose their ability to awe and intimidate. Add to this the hubris arising out of America's recent military successes - Afghanistan, Bosnia, the Persian Gulf War, Panama, Grenada - and you have an almost irresistible martial impulse.

Despite all that, there remain fundamental geopolitical factors lying just beneath the surface, unspoken but basic, and access to petroleum is one. The Bush administration wants to remake the world, but for reasons beyond simply imposing American values on benighted multitudes oceans away. Spreading democracy and market economics is desirable, but guaranteeing an oil supply is essential. The fact is we're running out; they've got it, and we need it. Material abundance is every bit as integral to the American way of life as the concept of freedom, and the ability to use and waste energy as we see fit is central to our national self-image.

In 1997, according to the Department of Energy, the United States consumed 18.6 million barrels of oil per day, the most of any country in the world and nearly 26 percent of total global consumption. This is not a new phenomenon, but one decades in the making. Since 1982 alone, American consumption has risen by a third; it is expected to rise another third by the year 2020. The national oil hunger has been particularly pronounced in the transportation sector, which accounts for two-thirds of our usage, and where demand has climbed by 1.4 percent a year for the past three decades.

Drilling domestically for more oil has always been the answer in the past, but it's no longer viable for the future. Oilmen know that reserves (proven oil deposits) are the name of the game; you can't pump what's not there. Using data provided by the DOE, the World Resources Institute calculates that American oil companies have already exhausted 90 percent of the country's petroleum reserves, which are now down to 21 billion barrels - just 2 percent of the world supply.

Crude oil production in the Lower 48, WRI reports, peaked in 1970 and has fallen since by half, as has production on Alaska's North Slope, which peaked in 1988. As a result, Uncle Sam became import-dependent a generation ago and is becoming more so all the time. From around 30 percent in the early 1980s, imports as a proportion of annual U.S. oil consumption have climbed to 55 percent today; they are projected by the DOE to reach 70 percent in 2025, and it is here that Iraq enters the picture.

Iraq, the source of barely 8 percent of America's foreign oil, is presently a minor factor in the U.S. market - our leading suppliers are Saudi Arabia, Mexico, Canada, and Venezuela - and a second-tier producer on the world stage, but Iraq also sits on geological riches beyond comprehension; its estimated 100 billion barrels of untapped crude (10 percent of the world's total) place it second only to Saudi Arabia in terms of proven reserves. Moreover, as The Guardian of Great Britain reported last fall, Iraqi sources believe that when fully explored, their country's oil regions will be found to contain over 300 billion barrels - or more than a quarter of all the oil on Earth.

America's petroleum giants have long suspected as much and have operated accordingly. Iraq represented the U.S. industry's first venture into the Middle East. Exxon (then called Jersey Standard or Esso) and Mobil were involved in the hunt for Iraqi oil as early as the 1920s, when they joined a British-Dutch-French consortium formed after World War I to exploit the resources of the defeated Ottoman Empire, from which Iraq was formed by the victorious allies. The so-called Iraq Petroleum Company resisted native Iraqi participation in its enterprise and proceeded to manipulate national oil development for the benefit of the syndicate partners, often secretly holding back production (and thus the Iraq government's royalties) in order to restrict world supplies and boost world prices. Such actions by Western multinationals explain much about why "they" hate us.

The party was great for the participating companies while it lasted. An independent financial analysis revealed that the Iraq Petroleum Co. realized net profits on its assets of nearly 60 percent throughout the 1950s and 1960s. Exxon's share in IPC was estimated to have been worth $130 million on an investment of $14 million in the 1930s, during which time the company made twice in profits what it paid the Iraqi government in royalties. In 1972-73, however, Iraq spoiled things by nationalizing its oil industry and creating the current state-operated Iraq National Oil Co., which has since joined OPEC (Organization of Petroleum Exporting Countries) and engaged in hard-nosed business negotiations with the former syndicate members.

Major petroleum companies have been chafing under the altered circumstances ever since, and there is little doubt that the present Bush-Cheney government of, by and for oilmen would look favorably upon a reprivatized, non-OPEC Iraqi oil industry following "regime change." So would any puppet rulers that government might install in Baghdad. In December, a key member of the Kurdish opposition to Saddam told PBS' "NewsHour" that the leadership of postwar Iraq would almost certainly privatize the nation's oil sector, opening it up once more to American energy firms. They must be salivating in the boardrooms of Big Oil.

In the meantime, our national appetite for cheap petroleum has precipitated a sharp-elbowed, worldwide search for accessible supplies. American companies are making oil deals (some shady) with the oligarchs of the former Soviet Union. They are pressuring Washington to negotiate expanded U.S. penetration of Canada's oil market through elimination of that country's energy regulations. There is even low-level political buzz that we may have to intervene to straighten out the oil crisis in Venezuela - another U.S. supplier with an inconveniently nationalized industry. Obviously, oil is not solely at issue with respect to Iraq. But is it a large part of the equation? You bet.