www.sfgate.com Carolyn Said, Chronicle Staff Writer Thursday, February 27, 2003

With war clouds on the horizon and frigid weather gripping the Midwest and East Coast, energy prices across the nation have soared to record highs, while inventories have fallen.

Crude oil futures for April delivery hit $37.70 a barrel Wednesday, their highest level since Iraq's 1990 occupation of Kuwait.

The higher prices and tight supplies are hitting crude oil, gasoline, heating oil, diesel and natural gas.

"This is serious," said John Kingston, global director of oil for Platts, a McGraw-Hill energy information service in New York. "Everybody has been stunned by this continued cold weather; it is fricking freezing out here. We're seriously pulling on inventories at a time when we should not be pulling on them."

Jitters over a potential war with Iraq and a Venezuelan strike that constrained that country's oil exports have helped fuel a 43 percent jump in oil prices over the past three months. Iraq and Venezuela produce about 7 percent of the world oil supply.

Consumers are feeling immediate sticker shock from the increased fuel costs when they fill their gas tanks and pay their heating bills. Higher fuel costs also are likely to propel the cost of a range of energy-dependent products and services, from airline tickets to UPS deliveries.

"This will cause short-term economic difficulties, no question about it," said Ross DeVol, an economist with the Milken Institute in Santa Monica. "Consumers are running out of steam. This will take discretionary income out of consumers' pocketbooks at a time when consumers had been carrying the economy. It comes at a very problematic period."

Adrian Hines of Belmont, who drives at least 100 miles a day for his job installing DirecTV satellite TV systems, is one consumer who's already reining in discretionary spending because of the gas hikes. Hines, who pays for gas out of his own pocket, winces when it's time to fill up his 1986 Ford Ranger now that prices are around $2 a gallon.

"It's definitely going to be a drain on my profit," he said. He, his wife and their 7-year-old will try to save the money elsewhere. "We're going to have to cut back on leisure-time things, movies, dinners out, taking trips," he said.

Bay Area utility customers, the majority of whom heat their homes with natural gas, also are likely to feel some fallout from higher natural gas prices nationally.

Natural gas prices surged earlier this week to their highest level in two years before dropping slightly on Wednesday.

"We could be in shorts weather here, but if it's 35 below in Chicago, it has an impact on us," said Jason Alderman, a spokesman for PG&E in San Francisco.

PG&E BUYS IN SUMMER

PG&E cushions price fluctuations by buying natural gas in summer, when prices are low, and injecting it into huge underground storage facilities for use during the winter. But the company still buys some portion of its natural gas at market prices -- for competitive reasons, it declined to specify how much. PG&E doesn't take a markup on gas; it passes along market costs plus a transport charge.

"There's definitely an impact on our residential customers when prices go up so dramatically nationwide, but that is tempered by our shrewd buying habits," Alderman said. "We're looking at prices in New York and Chicago and Louisiana going up by 50 percent to 100 percent within the past week. Our customers will not see anything like that."

The utility is now calculating how much February gas prices will rise for customers, he said; it expects to have that figure available today.

Natural gas prices have been affected by the freezing weather in much of the country, which has increased its use for heating. Inventories are 43 percent less than last year at this time -- and there's no easy way to increase supplies because the whole country gets gas from the same existing fields in the United States and Canada.

"You're fighting with everyone else for the same commodity," said Paul Rolniak, vice president of EAI Inc., a Denver energy consulting firm.

"If there's a squeeze on supplies, there's nothing that can come to the rescue," Kingston said. "You can bring some in (from overseas) in liquefied form, but you can't ramp that up very easily. Even if you had a flotilla of it coming it, it would have a relatively small impact."

Natural gas prices also affect the cost of electricity, much of which is produced in gas-fueled plants. PG&E says "only a tiny sliver" -- less than 2 percent -- of its electricity is bought on the spot market, where wholesale prices have risen to $140 a megawatt hour. PG&E electricity rates for consumers are set by state regulators, rather than directly linked to market fluctuations.

ALASKAN PRICES

Meanwhile, crude oil prices are being dramatically affected by ongoing geopolitical uncertainty.

"Last year, crude oil was 21 bucks a barrel," Rolniak said. "Now, the Alaskan North Slope crude being delivered into California refineries is around 36 bucks a barrel."

Gasoline, heating oil and diesel are all refined from crude oil and so reflect any increases in crude prices.

On Wednesday, the Department of Energy reported declines in U.S. inventories of oil and petroleum products, further spooking energy traders.

Oil inventories fell by 1 million barrels to 271.9 million barrels for the week ended Feb. 21, the Energy Department said. That was 14 percent less than last year at this time.

On Tuesday, Energy Secretary Spencer Abraham told a Senate hearing that the Strategic Petroleum Reserve should not be used to manage price fluctuations. The 600 million barrels of oil stored in underground salt caverns on the Gulf of Mexico will be used only in case of "any severe disruptions," Abraham said.

In other words, energy analysts say, the government will tap its emergency oil reserves only for major events, such as a war with Iraq.

"If war came, and Iraq's 2 million barrels a day (were no longer available),

the Strategic Petroleum Reserve could do that, no problem," said Kingston.

In ultimate worst-case scenarios -- if the Iraqi military somehow cut off production or exports from Kuwait and even Saudi Arabi -- "that would be complete chaos," he said. "Taken to the extreme, that would take 10 to 12 million barrels a day out of 77 million barrels a day world consumption. No way in hell could you replace that."

The Bloomberg News service contributed to this report. / E-mail Carolyn Said at csaid@sfchronicle.com.

reuters.com Thu February 27, 2003 05:47 AM ET By Ellie Tzortzi

VIENNA (Reuters) - OPEC said Thursday it could cover any stoppage of Iraqi oil during war without the need for consumer countries to release emergency reserves.

"Yes, we are confident we can manage the situation given the level of production in Iraq," cartel secretary-general Alvaro Silva told reporters at a news conference at OPEC headquarters.

"OPEC has been managing the case of Iraq for more than 10 years. We will try to alleviate the situation in the normal way and meet our commitment to stabilize the market."

Silva said the producer group was already pumping beyond official output limits but could not stop speculators driving oil prices higher.

Speaking as U.S. oil prices set a post-Gulf war high of $38.66 a barrel, he said: "This is not a problem of oil in the market, it is a problem of speculation."

"We put 2.8 million barrels a day more in the market in December and January and you can see the result," he said of extra OPEC output.

Industrialized consumer nations have yet to decide whether or not they will release crude from emergency stockpiles, should the United States launch an attack against Baghdad.

OPEC is hoping it has convinced the Paris-based International Energy Agency, which controls the reserves, that a repeat of its 1991 Gulf War emergency release will not be required.

OPEC says it has the capacity to fill any shortage from Iraq, as well as compensate for shortfalls from Venezuela, where a strike is in its 12th week.

Silva said OPEC had another four million barrels a day of spare supply ready to call on, easily enough to cover Baghdad's 1.7 million bpd of exports.

But with leading OPEC member Saudi Arabia already thought pumping nine million of its available 10.5 million bpd, independent experts put spare supply in the cartel at little more than two million.

OPEC meets on March 11 and is expected to leave official supply quotas unchanged.

Delegates have said it may suspend quotas altogether during the period of any war although Silva played down that possibility.

"It is not an issue of suspending quotas. The quotas have been functioning well," he said.

"But of course in the case of catastrophe that's another question. Nobody knows the result of a war."

seattletimes.nwsource.com Thursday, February 27, 2003 - 12:00 a.m. Pacific By Luke Timmerman Seattle Times business reporter

Why have gas prices jumped so quickly? Part of it is the threat of war in an oil producer like Iraq, a general strike in oil-rich Venezuela, and the East Coast's harsh winter, which is burning up heating oil.

But another part of the story is the way the gas business is dominated by a few big oil companies. In Washington, a series of mergers has left just four oil giants largely in control of refining, transportation and retail sale of gasoline.

Those companies control gas prices through large numbers of corporate-owned stations with secret neighborhood-by-neighborhood pricing formulas. Prices can be dramatically different from one location to another largely because the owners have decided they can charge more.

Nevertheless, as Puget Sound and the nation begin to see $2-a-gallon gas, the underlying cause is a nationwide shortage of crude oil.

The Energy Department yesterday announced that U.S. oil inventories have fallen to 271.9 million barrels — 50 million barrels, or about 16 percent, less than a year ago. That sent crude-oil prices, which were $19 a barrel a year ago, to nearly $38, a 12-year high.

In Venezuela, a long strike by the state-owned oil producer has just ended, but it will take months for production to return to normal. Meanwhile, the East Coast cold wave has consumed more heating oil, leaving less refinery capacity and crude oil to make gasoline.

It could get worse — a lot worse.

"The supply situation in the U.S. and parts of Asia is very, very dangerous," said Tetsu Emori, a commodity strategist at Mitsui Bussan Futures Ltd. "It's easy for crude-oil prices to reach $45 to $50" per barrel if a war starts in Iraq.

Ron Planting, an analyst with the American Petroleum Institute, an oil-industry trade group, said gas prices historically tend to rise rapidly following a rise in crude prices, even though today's gas was made from yesterday's less-expensive crude oil.

"Uncertain supplies from Iraq's neighbors in the future make current supplies more valuable," Planting said.

Ironically, when prices go up, local gas-station operators often get squeezed worse than consumers.

Tim Hamilton, executive director of AUTO, a trade group of 500 gas-station dealers in Washington, said the big oil companies set wholesale prices that usually leave margins of 8 cents to 11 cents per gallon for local operators to pay labor costs, taxes, utilities and other expenses, and keep whatever is left for profit.

But when pump prices shoot up, consumers tend to shop around more aggressively for cheaper prices. That forces stations to make sure their prices aren't the first to go up, which squeezes their margins down to 7 cents or 8 cents per gallon, Hamilton said.

For a typical station operator, that can mean $2,500 per month less to pay the bills, raising the pressure to make money on Twinkies or other convenience items, he said.

That situation arises at a time when station operators are already frustrated by the oil companies' zone pricing system, in which stations are charged different wholesale prices through a secret formula that appears to factor in location, affluence, proximity of competitors and customers' willingness to pay.

It's the system that explains why gas can cost so much more on Seattle's Queen Anne Hill than in Issaquah. Court challenges have allowed the practice to stand, as long as oil companies don't collude to set zone prices.

Hamilton said his members are worried that the stars are aligned for gas prices to possibly go as high as $2.50 a gallon or more this summer. This latest round of short supplies comes on the verge of springtime, when people traditionally get out of the house and drive more, boosting demand for gas.

In addition, with California's prices averaging 20 cents higher than here, oil companies might ship gasoline south to fetch the higher price — which could drive up our cost, Hamilton said.

Plus, when refineries try to catch up and replenish supplies in the spring, they often run at full speed, sometimes leading to accidents such as fires or explosions. That's just another factor that could constrain supplies and further drive up prices.

Luke Timmerman: ltimmerman@seattletimes.com or 206-515-5644. Bloomberg News contributed to this report.

www.news.com.au February 27, 2003

OIL prices have surged to their highest level since the Gulf War and could easily surpass $US40.00 a barrel, analysts have said. "Crude stocks are low and when you get problems in a major producing region such as Venezuela and potential problems in the (Persian) Gulf, another huge producing region, there is only one way prices can go," Commonwealth Bank of Australia chief commodity strategist David Thurtell said.

Overnight oil prices hit a new post Gulf War high of $US37.90 ($62.63) a barrel, up $US1.84 and within reach of the record $41.15 hit in October 1990.

London Brent crude gained 76 cents to $33.08 a barrel.

Driving prices higher was a United States government report revealing a big drop in winter heating fuel stocks as the Bush administration continues to prepare for a possible war against Iraq.

As parts of the US endure a colder-than-normal winter, supplies of heating oil in the week to February 21 fell 3.9 million barrels to 36.1 million barrels, a 33 per cent deficit from a year ago.

The crisis in Venezuela, a major supplier to the US market, has also placed pressure on US inventories.

"It has been a fairly cold winter in the US and that has led to a big demand for heating oil," Mr Thurtell said.

"The problem with that is a big source of supply to the US has been Venezuela and there has been a strike in Venezuela."

Mr Thurtell said that on top these "real" elements impacting oil prices, the market had factored in the possibility of war against Iraq.

"Potentially there is a huge disruption of shipping in the Gulf.

"That is the fear factor and you have those real factors."

Despite expectations that oil prices will strengthen in the short term, shares in leading Australian oil and gas producers Woodside Petroleum Ltd and Santos have reacted indifferently.

At 1503 AEDT, Santos was one cent firmer at $5.83 while Woodside had slumped 22 cents to $10.64.

"It (Woodside) may have something to with their looming production gap but it is hard to know (why the stock has fallen so sharply)," Deutsche Bank energy analyst John Hirjee said.

"It is clear that most investors are thinking on the line that you sell oil equities when the oil prices are high rather than buy, but nonetheless you would expect some response to the underlying commodity given it does have a significant influence on profits."

Woodside still seems to be suffering from negative sentiment after last week reporting a $92 million full-year loss a writing down exploration expenditure and its investment in Oil Search Ltd.

Underlying earnings dipped almost 11 per cent.

Woodside also foreshadowed lower-than-expected production in 2003.

afr.com Feb 27 09:11 AFP

World oil prices bolted higher on Wednesday as the twin threats of a possible war in Iraq and low US oil supplies spread fear, traders said.

News that US inventories were close to a 27-year low during a deep freeze, with the threat of a major disruption from a Middle East conflict looming, frightened traders, analysts said.

"The inventory data set panic and fear in the minds of traders," said Fadel Gheit, senior energy analyst at Fahnestock and Co.

"They are starting to think that in the event of a supply disruption we'll be in big trouble," he said.

"Everybody is waiting for a decision regarding war," Gheit added.

"Is the United States going to war alone or with allies? Will this be a long war or a short war? Is Saddam going to stay or not? Are the Iraqi fields going to be left intact?"

New York's benchmark light sweet crude April contract shot up $US1.64 to $US37.70, just shy of a 29-month high, and analysts said the trip to $US40 a barrel may be short.

In London, the price of benchmark Brent North Sea crude oil for April delivery leapt US75¢ to $US33.07 a barrel. advertisement advertisement

According to the Department of Energy, US crude oil stocks fell 1.0 million barrels or 0.4 per cent to 271.9 million barrels in the week ended February 21 when compared to the previous week.

The inventories neared a 27-year low of 269.8 million barrels reported February 12.

Crude oil imports, squeezed by a strike that shook major exporter Venezuela's petroleum industry, fell 437,000 barrels to 8.325 million barrels a day, the government said.

"We've been locked in a deep freeze for two months. We have a potential supply disruption and an important supplier, Venezuela, has kept a significant portion of its production off the market because of the strike," said Mike Fitzpatrick, analyst at Fimat.

"It's only two dollars to get to $US40 (a barrel). We could get there very rapidly," he warned.

"We are at levels right now where it's impossible to tell where we're going," Fitzpatrick said. But "all fundamental elements point to a higher market".

The spectre of a war in Iraq fuelled the rise after Iraqi President Saddam Hussein declared that he would never accept a deal to go into exile, vowing instead to die on his native land.

But Saddam also said his forces would not blow up Iraq's oil wells in the event of war. Baghdad's retreating forces torched fields in Kuwait at the close of the 1991 Gulf war as US-led forces chased them out of the emirate.

Commerzbank analyst Steve Turner in London said prices were helped by Organisation of the Islamic Conference (OIC) members who said they were considering using oil as a "weapon" to fend off an attack on Iraq.

Malaysian Prime Minister Mahathir Mohamad, who called the informal meeting of 48 OIC nations in Kuala Lumpur, warned that tinkering with the oil market could backfire on poorer nations but said it must be considered.

"Some say it might cause a lot of repercussions, but if we don't think about it we may not be able to exert some influence in our favour," Mahathir said.

But "Oil is a double-edged weapon," he added.

"The price of oil goes up, many of the countries of the south are going to suffer the most, many of those poor countries who have no oil."