Prayin' for a warm Winter

["Lisa & Ian Murray" <seamus@xxxxxxxxxxxxx>]

[wonder if these folks have seen chapter 6 of Paul Ekins latest book? Full
article at
http://www.iht.com/IHT/TODAY/WED/FPAGE/oil.2.html ]


Paris, Wednesday, September 13, 2000
Wider Cost Of Oil Rise: Chaos for Economies
By William Drozdiak Washington Post Service

VIENNA - For much of the past decade, an extraordinary windfall in the form
of cheap oil fueled unprecedented prosperity in the United States,
subsidized Europe's costly social welfare programs and helped much of Asia
recuperate quickly from a perilous financial meltdown.
But as crude oil prices continue their dizzying ascent - at $35 a barrel,
they have more than tripled in less than two years - there are harbingers
that the good times may be lurching toward a demise that could profoundly
reshape the nature and contours of the global economy.

The failure by OPEC ministers to stabilize volatile oil markets with their
latest decision in Vienna to raise output by 800,000 barrels a day has
compounded fears of economists who believe that a serious energy crisis
looms - and world leaders appear to have no clear ideas about how to cope
with it.

Unless oil prices drop suddenly and sharply - which analysts say seems
unlikely with fuel inventories at rock bottom and the cold weather season
approaching in the West - several negative factors appear to be converging
toward an ominous reckoning point by January. Regardless of whether Al Gore
or George W. Bush moves into the Oval Office, the next U.S. president may
discover that energy will become his most urgent policy priority.

Besides soaring crude prices that triggered sharp spikes in the cost of
gasoline and heating oil, natural gas prices have surged to all-time highs.
Those countries, such as the United States, that have shied away from
nuclear and coal-fired power plants for environmental reasons will almost
certainly face widespread electricity shortages by the end of the year,
energy experts say.

An inflationary jolt this winter delivered by an electricity price shock -
on top of a possible heating fuel crunch - could compel the U.S. Federal
Reserve and other central banks to drive up interest rates much more than
expected. That, in turn, could provoke the precipitous fall in equity
markets that many crash-minded Cassandras have been forecasting.

''Right now there is a lot of fear and a lot of uncertainty because few
people expected oil prices would rise so high and so fast,'' said Leo
Drollas, chief economist for the Center for Global Energy Studies, a British
research group. ''I think the only thing we can do is pray for a very warm
winter.''

In contrast to previous energy crises, many experts are baffled by the
recent turmoil in oil markets. During the 1970s, huge leaps in crude prices
could be attributed to supply interruptions caused by the Arab oil embargo
at the time of the 1973 Middle East War or the revolution in Iran in 1979.

This time, traders and analysts say, there seems to be plenty of oil
available for those willing to pay steep prices.

''There are no real shortages for crude, only for certain refined
products,'' said Mehdi Varzi, director of oil market studies for Dresdner
Kleinwort Benson. ''The cost of oil production has fallen dramatically over
the past two decades; and with new sources coming on line, it's hard to see
how prices can be sustained at anywhere near their current levels over the
long term.''

But other specialists say depleted reserves in many Western countries almost
guarantee that prices will remain chaotic for the next 18 to 24 months.

''The only way to create a stable balance is through price movements large
enough to bring demand in line with supply,'' said Steven Strongin, oil
research director at Goldman Sachs. ''We continue to see the current
situation holding until either a surge in new drilling produces significant
new oil supplies or until some event triggers a global recession.''

While the Organization of Petroleum Exporting Countries insists that it
wants to see oil prices drop about $10 - and hover at $22 to $28 dollars a
barrel - its efforts to calibrate the market have been a fiasco. After
announcing OPEC's third production increase for a total this year of more
than 3 million extra barrels a day, the cartel's secretary-general, Rilwanu
Lukman of Nigeria, said he still did not understand how much oil was needed
to stabilize markets.

''More than enough? Less than enough? Who knows?'' he asked with evident
exasperation.

What does seems clear is that higher prices have already caused a startling
shift in the economic fates of many countries over the past two years. When
prices plunged below $10 a barrel in December 1998, the sharp fall in income
threatened many oil states - from Saudi Arabia and Iran to non-OPEC
producers like Russia and Mexico - with dire financial and political
consequences.

The Saudis, who during oil's heyday had one of the world's highest per
capita incomes, were forced to borrow substantial sums of money and enact a
harsh austerity budget that posed the prospect of social upheaval for one of
the West's most strategic allies. Governments in Nigeria, Venezuela, Algeria
and Indonesia fell in large measure because of the mounting sense of
economic desperation caused by shrunken oil revenues.

But lately, their fortunes have changed remarkably for the better. OPEC
producers are expected to earn at least $250 billion this year, up
substantially from $160 billion last year and $116 billion in 1998,
according to Petroleum Finance Co. of Washington.

As a result, the economic picture has brightened considerably for countries
that only recently were worried about imminent collapse. Saudi Arabia has
bolstered its foreign assets by $80 billion in unanticipated gains, while
Iran has quadrupled foreign exchange reserves to $5 billion and paid off $12
billion of its external debts.

Among consuming nations, the economic outlook is starting to appear much
bleaker than just a few weeks ago. After a summer of price shocks at the
pump that sent gasoline prices well above $2 a gallon in many parts of the
nation, the United States now faces a serious shortfall in heating oil
stocks and electrical power that poses hardships for California and the
Northeast.

A University of Houston study of the shifting outlook in the global energy
picture says the energy infrastructure of the United States is now ''greatly
weakened.'' The study cited the lack of a national policy to address
fundamental problems ''starting with our ability to produce and transport
oil but spreading also to stable and adequate supplies of oil products such
as heating oil and gasoline, natural gas and electric power.''

In Europe - where the burden of crude prices paid in dollars has been
compounded by the sliding value of the euro - public resentment over
exorbitant gasoline taxes that account for 80 percent of the price at the
pump have spilled over into the streets.