www.washingtonpost.com By John M. Berry Washington Post Staff Writer Saturday, February 22, 2003; Page E01

Consumer prices rose 0.3 percent last month, led by the higher costs of gasoline and home heating oil, but the average price of other goods and services that U.S. households buy increased only 0.1 percent, the Labor Department reported yesterday.

Analysts said petroleum-based energy costs probably will continue to rise until the U.S. dispute with Iraq is resolved. But they predicted that those increases would not trigger a broad increase in inflation, particularly with the economy still not recovered from the 2001 recession.

A number of the analysts expressed more concern that the need to pay more to travel by car and to heat homes might cause people to cut back on other purchases, keeping economic growth low.

"Experience tells us that oil-price spikes like this are usually soon reversed, and so we should view them as transitory rather than a permanent feature of the inflation statistics," said economist Stephen G. Cecchetti of Ohio State University. "That means that it is extremely important to look at so-called core measures designed to smooth over these 'noisy' episodes.

"Here the picture is much as it has been for some time. The consumer price index excluding food and energy -- the traditional core measure -- . . . is up 1.9 percent for the past 12 months," Cecchetti said. "My reading is that inflation continues its modest retreat."

Inflation was 2.4 percent last year and has not been higher than 3.4 percent since 1990.

Peter Hooper, chief economist at Deutsche Bank in New York, took the same tack.

"Oil prices are up more than $10 per barrel since early December reflecting war worries, cold weather and Venezuela's [political] problems. But the core CPI inflation remains comfortably near 2 percent, and the Federal Reserve is not likely to be concerned about either inflation or deflation at this juncture," Hooper said.

Many Fed officials, including Chairman Alan Greenspan, have said they are determined to prevent either inflation or deflation. During deflation, the general level of prices falls, such as has been happening in Japan in recent years. Borrowers find it harder to repay debts and employers may find it hard to control labor costs even if they do not grant pay increases.

In the past, Fed officials have often drawn a distinction between temporary bursts of inflation because of specific conditions that are likely to be temporary -- such as an oil price spike -- and more fundamental increases in inflationary pressures. That might include a period in which employers' costs for wages and benefits rise well above offsetting gains in productivity.

With unemployment close to 6 percent in recent months, increases in average hourly earnings have been smaller. Last month, average hourly earnings were unchanged from December and up 2.7 percent from January 2002. Over the previous 12 months they had increased 3.8 percent.

In yesterday's consumer price report, Labor said food and beverage prices fell 0.2 percent and apparel prices declined 0.9 percent. It was fifth consecutive monthly drop in the price of clothing.

Gasoline prices were up 6.6 percent after two months of small declines. Home heating-oil prices rose 8.6 percent.

The cost of shelter, which includes rents and the cost of home operations, rose 0.3 percent. Education and communication costs increased 0.5 percent, partly because of a 2 percent increase in prices for college textbooks. After many months of much larger increases, medical care costs increased only 0.1 percent last month.

Over the past 12 months, the CPI rose 2.6 percent, but over the November-January period it increased at a 2.2 percent annual rate. In November through January, the core CPI rose at a 1.5 percent annual rate.

www.washingtonpost.com By Colum Lynch Washington Post Staff Writer Saturday, February 22, 2003; Page E01

UNITED NATIONS, Feb. 21 -- American oil refineries have dramatically increased their reliance on Iraqi crude, even as the Bush administration steps up preparations for a military attack against Baghdad, to offset a shortfall in oil imports caused by a recent political crisis in Venezuela.

The United States has more than doubled its consumption of Iraqi crude over the past two months, buying more than $1.6 billion in Iraqi oil through foreign middlemen between Dec. 5 and Feb. 1, according to unpublished U.N. figures. The U.S. Department of Energy, whose Iraqi import figures typically lag behind -- by about 40 days -- those of the United Nations, also recorded a sudden surge of Iraqi oil imports into the United States last week to more than 1 million barrels a day, according to U.S. officials.

"We did have a large increase in Iraqi imports, but we don't know if that is sustained," said Doug MacIntyre, an international energy analyst at the Department of Energy who produces an unpublished weekly report on oil imports. MacIntyre declined to provide specific figures, citing concerns that the underlying data was too preliminary, but he said it was "a doubling over the averages we have seen over the last several weeks."

Iraqi exports to the U.S. market, which includes the Caribbean, averaged nearly 500,000 barrels a day during the first 11 months of 2002. U.S. firms purchased only 39 percent of Iraqi oil exports during the second half of last year. Between Dec. 5 and Feb. 1, U.S. buyers consumed about 1.1 million barrels per day, accounting for 62 percent of Iraq's exports during that period, according to U.N. figures.

The trend marks a significant reversal by U.S. oil companies, who drastically cut their dependence on Iraqi oil last summer because of rising illicit Iraqi surcharges and concerns that the Bush administration was preparing for a war.

Under the terms of the United Nations-supervised Iraqi oil-for-food deal, Iraq is permitted to sell oil to purchase food, medicines, fund the repair of the country's infrastructure and finance U.N. weapons inspections. Under the humanitarian program, established in December 1996, the U.N. sets the prices of Iraqi exports and monitors Baghdad's spending.

Although Iraq rarely sells oil directly to American oil companies, ExxonMobil Corp., ChevronTexaco Corp., Valero Energy Corp. and other U.S. firms have purchased more than half of Iraq's oil through foreign middlemen since the oil-for-food program came into existence. Spokesmen for ExxonMobil and Valero could not be reached for comment.

Some American oil giants, hit with rising surcharges and facing criticism that they may have indirectly paid illegal kickbacks to President Saddam Hussein, began scaling back their imports of Iraqi crude last summer. U.N. officials claimed that Iraq was imposing surcharges of 20 to 50 cents on each barrel last year, amounting to hundreds of millions of dollars in illicit profits for the Iraqi regime.

But oil analysts say that Iraq's decision to stop demanding a surcharge in September, and a sudden stoppage of Venezuelan exports following a national strike, has renewed American interest in the Iraqi oil market. "The loss of Venezuelan oil complicated everybody's life," said Lawrence J. Goldstein, president of the New York-based Petroleum Industry Research Foundation. "Iraqi oil is close to the Venezuelan type oil, and it turned out to be the only large-volume alternative available" over the past two months.

He suggested that American dependence on Iraqi oil is likely to diminish in the coming months as Venezuelan exports "creep back" up to traditional levels and the recent commitment by Saudi Arabia to increase production bears fruit.

Other analysts believe that Venezuela's oil exports will continue to be plagued by political uncertainty. They note that while Venezuela's oil strike has ended, the country is exporting only about half of the 3 million barrels it traditionally exports daily.

"I think that as the surcharge has faded, the concern that kept some people away from Iraqi oil has also faded," said George Beranek, the manager of market analysis at Washington, D.C.-based PFC Energy. "It's a good large-volume source of oil. The risk of a decline [in potential Iraqi exports] was nothing compared with the fact of a loss of Venezuelan barrels. A bird in the hand is worth two in the bush."

U.S. officials and analysts said that the American oil refiners should be able to withstand the sudden loss of Iraqi crude if a U.S.-led war leads to a shutdown on Iraqi exports. "People have gotten pretty used to the instability," said Lowell Feld, another energy analyst at the Department of Energy. "Iraqi crude has fluctuated pretty wildly" for some time.

But he said that a total collapse of Iraq's daily oil production, which is estimated to average 2.3 million barrels a day this month, could strain global oil production capacity.

www.iht.com Tony Smith NYT Saturday, February 22, 2003   SAO PAULO With crude oil prices edging toward $40 a barrel and a shortfall looming in world production, the two main producers in South America - Petrobras of Brazil and the Spanish-owned Repsol YPF of Argentina - might be forgiven for spotting a silver lining among the clouds of war gathering over Iraq. Remote from the potential combat zone and convenient to the United States, both companies could find ready buyers for stepped-up oil exports and give the economies of their home countries a welcome injection of fresh petrodollars. But in fact, analysts say, neither company can expect to reap a windfall, because of economic volatility, changing government regulations and growing political pressure to keep a lid on fuel prices at home. Energy analysts say a war in Iraq and the continuing instability in Venezuela could combine to depress world daily oil production by 3.5 million barrels, to about 73 million barrels. Most members of the Organization of Petroleum Exporting Countries are already pumping oil at near-capacity rates, so the shortfall would have to be made up by non-OPEC suppliers. Increased output in Russia and Norway would probably fill part of the gap; the remainder is where the opportunity lies for Latin American producers, principally Mexico, Brazil and Argentina. "Anyone who is producing will benefit from higher prices," said George Beranek, an analyst at PFC Energy in Washington. "Petrobras and YPF will also benefit, provided they can get the world price." But that last proviso is crucial. With the advent Jan. 1 of a left-leaning government in Brazil, Petroleo Brasileiro SA, as Petrobras is formally known, appears likely to lose some of the autonomy it has won over the past decade, especially regarding prices. The Brazilian state owns 56 percent of the voting shares in Petrobras and names its top management. President Luiz Inacio da Silva has made two political appointments that will effectively tame Petrobras. A little-known senator, Jose Eduardo Dutra, will take over the company's presidency from the respected, market-friendly Francisco Gros, and Sergio Gabrielli, an academic economist with little commercial experience, will become chief financial officer. Petrobras's refinery prices for fuel are now 23 percent lower than those in the United States, a situation that the company cannot maintain indefinitely. To run its refineries efficiently, it must import some lighter oil to mix with its own heavy crude and pay the going world rate for the imports. Gabrielli said Thursday that Petrobras would "alter prices as soon as possible," but that a recent surge in inflation might prevent the government from allowing any price increases for a while. Despite its dependence on imports of light crude oil, Petrobras, the largest industrial company in Brazil, has grown rapidly to become an aggressive player in global markets. Last year it was Brazil's top exporter, with much of its success coming in refined products rather than crude. In January, it doubled its exports of gasoline, mainly to the United States, after supplies from Venezuela all but ceased because of a nationwide strike against President Hugo Chavez. Petrobras is producing more oil than ever - 1.62 million barrels a day early this month. According to Fabiana Fantoni, an oil analyst at the Sao Paulo-based consultancy Tendencias, it has room to expand its exports of 235,000 barrels a day by about 8 percent. Doing so might bring in $500,000 a day in extra profit, Fantoni estimated - "not an extraordinary increase, but it would certainly be good for Brazil's trade balance." Still, she said, "Petrobras could increase its profit greatly if it kept its pricing at international levels." Though it stepped up production last year, Petrobras posted an 18 percent drop in net profit to $2.25 billion for 2002. After years of trade deficits, Brazil recorded a $13.2 billion surplus last year, offsetting a slide in foreign direct investment, which had financed past deficits. At the moment, though, tackling inflation seems to be the government's prime concern. The central bank has raised interest rates twice this year, despite da Silva's campaign pledges of easier credit. Unlike Brazil, Argentina is a net oil exporter. But it is still gingerly recovering from a four-year economic slump that broke the Argentine peso loose from its dollar-pegged moorings and upended the country's politics. And like his Brazilian counterpart, President Eduardo Duhalde has pressed his country's oil companies to limit their exports and hold the line on domestic prices to nurture the fragile domestic market. So Repsol YPF "can only export a certain part of its production," said Ian Reid, oil analyst at UBS Warburg in London, "and there's a question mark over whether it can pass on price hikes to consumers." And what oil it can ship abroad does not earn the company as much as it might. There is a 20 percent tax on exports, and government regulations say that at least 30 percent of export revenue must be brought back to Argentina to be spent or invested. At one point, the central bank thought the figure should be 100 percent. According to an official at another oil company in Buenos Aires, there is widespread concern in the industry that the economy minister, Roberto Lavagna, wants to increase the export tax rate now that world crude prices are above $35 a barrel. In January, Argentine oil companies reached an agreement with the government to freeze prices for three months and to supply crude to Argentine refineries at $28.50 a barrel, well below the current world price. Repsol YPF has been leading the oil sector's negotiations with the government.

ogj.pennnet.com By OGJ editors

HOUSTON, Feb. 21 -- Futures prices for oil and petroleum products fell Thursday as traders grappled with conflicting reports on US oil inventories by the US Department of Energy and the American Petroleum Institute.

DOE officials said Thursday that US oil stocks rose by 3.1 million bbl to 272.9 million bbl last week, while API reported those inventories fell by 3.34 million bbl. But since both indicated a significant increase in US imports, analysts said, traders apparently assumed there were errors in the API figures that would be corrected later.

DOE estimated that weekly crude imports surged to 8.8 million b/d, the highest level in 8 weeks.

Increased supplies of heavy crude from the Persian Gulf producers and Venezuela, coupled with extensive turnaround activity among US Gulf Coast refineries, are widening price differentials between light and heavy, sweet and sour oils.

"This will improve coking margins for several major refiners," said analysts Thursday at UBS Warburg LLC, New York.

Other observers said the oil market also gave up some of its war premium as reports leaked out that military action against Iraq might be delayed by some weeks as the US tries to secure more international support for such action.

Market prices The March contract for benchmark US light, sweet crudes dropped 37¢ to $36.79/bbl Thursday on the New York Mercantile Exchange, while the April position fell 92¢ to $34.74/bbl. Heating oil for March delivery plunged 4.06¢ to $1.06/gal. Unleaded gasoline for the same period lost 3.64¢ to 96.58¢/gal on NYMEX.

However, the March natural gas contract inched up 2.8¢ to $6.16/Mcf. "The market opened steady but soon jumped higher after the storage report was released, hitting a daily high of $6.22(/Mcf)," analysts reported Friday at Enerfax Daily. But the price then backed off as a result of profit taking to end near its opening level.

The US Energy Information Administration said 203 bcf of gas was pulled out of storage last week (OGJ Online, Feb. 20, 2003).

"The record levels of regional draws reported by the EIA since the start of 2003 have taken a whopping 1.2 tcf from storage and left capacity at an extremely bullish 36% by mid-February, compared with 59% (during the same period) in 2002 and a 42% 3-year average," said analysts Energy Security Analysis Inc.

They said, "By the end of the winter heating season, US natural gas storage levels could drop as low as 19%, the same bullish levels seen in the spring of 2001."

In London, the April contract for North Sea Brent oil fell 77¢ to $31.56/bbl on the International Petroleum Exchange. The March natural gas contract gained 5.2¢ to the equivalent of $2.81/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes lost 47¢ to $31.48/bbl Thursday.

www.upi.com By Gregory Fossedal Special to UPI From the Business & Economics Desk

WASHINGTON, Feb. 21 (UPI) -- As regular readers know, "The Bottom Line" has advised investors to hold a significant position in Russian stocks for some time, and funds we manage and advise have been invested accordingly over the last several years. It's been a great ride, with the Moscow Times Index nearly tripling since January of 2000 and rising more than ten-fold since 1999.

It may also be a sign that the Russian market as a whole is about to take a breather, settling into a slower growth track of 10-20 percent per year, with some sectors actually heading south.

It's not time to go short, but may well be time to lighten up, take profits, and find countries that are in the position today that Russia was in several years ago. (Some leading candidates, to be discussed in future articles, include Argentina, Israel, Southern Africa -- ex South Africa itself --, India, Iraq, and the Philippines.)

Even after this long surge, Russia today has several factors in its favor. Over most of the last few years, each has been generally moving in the right direction for Russia. These positive factors account for true political and economic synergy, which is generally what's needed for markets to double and triple in a matter of a couple years.

Factor one is the price of oil, Russia's largest export and the source of more than 40 percent of its federal government revenues last year. This has put Russia in a strong fiscal position, enabled it to pay off some (but not all) of a large number of short-term debt obligations, and put the budget in surplus. The surplus has relieved pressure on the tax code, particularly pension liabilities, which had been driving much of the Russian economy underground. In Russia, as in Sweden, 80 percent tax rates make for an economy of barter and bribes.

Oil at $35-plus a barrel, however, is unlikely to last. Oil prices are nearing their peak, with uncertainty over both Iraq and Venezuela driving oil close to $40 -- not coincidentally the price at which it peaked during the last Gulf War.

To be sure, there are ways to hedge against declining oil prices, both for the Russian government and investors in Russia. But many important effects of a declining oil price may have to do with feedback impacts that spread throughout the political economy. If you don't believe this, consider what happened to prices for houses, commercial real estate, savings and loans, financial services, and other sectors in Houston, Texas during the 1980s and 1990s oil price busts. Political careers ended and webs of corruption were uncovered.

We may be seeing the beginnings of such troubles in the scandals over Lukoil today in Russia. With a parliamentary election less than a year away, it wouldn't be surprising if Vladimir Putin's supporters, authors of the current prosperity, were to lose seats in the traditional manner of incumbent parties -- even successful ones -- and move into a more defensive posture.

Diplomatically, Putin appears well-positioned. This matters, especially for emerging countries. A strong and respected Russia has a stronger case for joining the World Trade Organization, and resolving trade disputes with protectionists both in Europe and the United States. Putin has built a friendship with George W. Bush that few European or Asian leaders save Tony Blair enjoy, but at the same time maintained his independence.

Still, it's hard to see how Putin has been able to use, say, his support for the war on terror, or acquiescence in America's strategic defense deployment plans, as leverage for relief from U.S. or European trade curbs. My own guess is that in the months after Iraq, Colin Powell will lead a rigorous effort to rebuild America's relationship with Germany, France, Russia, Korea, and others -- and these countries will benefit from dropped trade curbs, new free trade agreements, or both. Even if that's right, however, it's months away, and you can buy it when there are early signs of a détente.

The strongest bull case for Russia rests on domestic economic policy. This is, to be sure, the most important element of any international investment strategy, but particularly one that is buy-and-hold, focused on the long run, rather than trying to time buys and sells and make gains from trading. (The fund managers and advisors that work with me tend to do some of each, having a base position that is still "long Russia," but moving in and out on the margin based on events.)

The Russian tax code, thanks to Putin's reform, is one of the most labor-friendly in the world, with a 13 percent flat rate on income rivaled only by Hong Kong, Bolivia, and Botswana. The real estate market has been deregulated and is opening up to foreign ownership -- another Hong-Kong style measure that should not only be a boon for all Russians, but will make the whole country more attractive as a place to locate top-level managers and high-value-added production.

There are many little flies in this ointment, however. Russia's information technology sector, for example, has enjoyed much of its surge through piracy. Where piracy is concerned, China, with more clout with U.S. companies who feel they dare not alienate a nation of more than a billion consumers, is better positioned to steal and get away with it. Where honest, low-wage software and IT work is concerned, India seems to have an advantage.

Russia's stock market is loaded with companies with price-earnings ratios as low as 1-1, and averaging less than 3-1 overall. Still, one must question those earnings statements, and beware of the risk for catastrophic declines in individual companies likely to be involved in intellectual property suits, domestic or international corruption scandals, or sheer continued economic weakness in such major Russian trading partners as Germany and France.

Given this mixed picture, we're still invested in Russia, particularly the telecom, aerospace, real estate, and mining sectors. But we are selling off some of our holdings, and establishing a growing short position on oil as a hedge -- not just against Russian oil company declines per se, but the kind of political spillover that seems to happen in commodity economies (Texas, Mexico, Venezuela) when things turn sour. Emerging markets portfolios that have had Russia at 10 to 12 percent of assets should probably be moving that down to 6 to 8 percent, particularly when oil prices drop.

Are the bears gathering in Russia? Hardly. But the bulls look to be slowing from a stampede to a gallop, maybe even a trot. In a world where very few markets have been up, one can give some advice on Russia that's rare but refreshing: Take some profits.

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(Gregory Fossedal is chief investment officer of the Democratic Century Fund, managed by the Emerging Markets Group, dcfund.net. His firm may hold some of the securities mentioned in "The Bottom Line." Individual investors should contact their own professional adviser before making any decisions to buy or sell these or any related securities.)