Sept. 18, 2000, 11:43AM

Spiraling energy costs creating near-crisis situation The heat is on consumers By DAVID IVANOVICH Copyright 2000 Houston Chronicle Washington Bureau

WASHINGTON -- Boston resident Ruth Collins wonders how she'll afford enough home heating oil to see her through the winter.

Chicago homeowners are bracing for some painful natural gas bills when the weather turns cold.

San Diego customers are howling about the jump in their electric bills, while motorists in an oil town such as Houston are grumbling as they fill up at the corner gas station.

"If you don't have no money, you're just in trouble," Collins said.

In an unwelcome flashback to the 1970s, American consumers are suddenly finding themselves clobbered by hefty energy bills.

While conditions today don't add up to an energy crisis, analysts warn that the nation's energy sector is highly vulnerable to disruptions.

Oil prices on Friday reached their highest level since the Persian Gulf War, while natural gas prices are at record highs.

Supplies of home heating oil and natural gas are so precariously low, analysts are warning of dizzying price spikes if temperatures approach normal lows this winter.

"The market is too fragile," the International Energy Agency, the Paris-based energy security watchdog, warned last week. "The market lumbers from one problem to another, creating instability in its wake, dragging prices even higher."

And then there's Saddam Hussein. The oil markets have become so tight, and so dependent on the nearly 3 million barrels a day being produced by Iraq, that Saddam has regained the power to wreak havoc on the economies of the world.

Much of the current situation can be attributed to a booming world economy and some major missteps by the Organization of the Petroleum Exporting Countries.

But the government entity created to secure America's energy supply -- the U.S. Energy Department -- has shown itself to be ill-equipped to handle the current crunch, former senior department officials argue.

On Friday, President Clinton offered his assurances to a public worried that the recent energy price increases could throw the economy into recession.

"We have withstood this oil price spike very much better than we did when it happened before," Clinton said. "Now what we need to do is watch the situation closely."

His comments echoed those of many economists who say our new, high-tech economy is less dependent on oil-thirsty industries and thus less susceptible to price shocks.

Their analysis is about to be tested.

Providing help for needy The U.S. Energy Information Administration estimated earlier this month that Americans would pay 27 percent more this year to heat their homes with natural gas and 30 percent more with heating oil.

Boston resident Collins, who is 62 and living on a fixed income, is just now finishing up paying for the home heating oil she burned last year. "If it's much worse than last year, I don't know how we're supposed to survive," she said.

To help heating-oil customers like Collins, the federal government is establishing a special 10-day supply of heating oil in the Northeast to guard against shortages. And low-income residents like Collins are eligible to receive assistance to keep their homes warm through the winter.

To help improve the nation's energy security, Republicans have called on the federal government to relax restrictions and allow U.S. producers to drill in areas such as the Arctic National Wildlife Refuge. Democrats have pushed for continued development of cars that would reduce consumption by getting better mileage.

These long-term proposals are not going to help the nation survive the coming winter.

Administration officials insist that, no matter how painful energy prices are now, the current situation does not constitute a crisis. Energy is costly but available.

'97 crisis started it all Many of the nation's current energy woes hark back to the summer of 1997, when an economic and currency crisis rolled across East Asia. The recession that followed dampened world oil demand.

The OPEC cartel, which controls more than a third of the world's crude output, did not trim its output to match the reduced demand, and the overproduction sent oil prices crashing to $10 a barrel.

With prices at such depressed levels, U.S. producers slashed jobs and cut back on production.

Then the Asian economies recovered more quickly than expected and world oil demand began to outpace supply. Again OPEC responded, again too slowly, and now benchmark crude oil is worth nearly $36 per barrel.

Last week, the OPEC cartel agreed to raise its production ceiling by 800,000 barrels a day, its third production increase of the year. The tight oil supplies could move some OPEC members, particularly Iraq, to the forefront of the world stage. About 4 percent of the world's oil production last month came from Iraq, which sells crude under a United Nations-controlled oil-for-food program.

Saddam has been agitating for an end to economic sanctions imposed by the U.N. after Iraq's invasion of Kuwait. Oil analysts warn prices could soar far higher if Saddam decides to try to force the U.N.'s hand by turning off the spigots.

Daniel Yergin, head of Cambridge Energy Research Associates, said Saddam exerts greater influence over the oil markets now than at any time since he was dislodged from Kuwait.

Domestically, U.S. producers at first were reluctant to kick production back into high gear once prices had recovered, fearful of another crash.

While the U.S. economy continued to hum along, natural gas production lagged. The strong economy meant rising demand for electricity. And the fuel of choice for new electric generating plants is cleaner-burning natural gas.

That combination of slackened natural gas production and rising demand led to the current market crunch.

"Prices as recently as a year ago were awful, and in that kind of environment people have not been bringing new supplies on," noted Jeffrey Skilling, president of Houston-based Enron Corp. "So we have this continued strong growth in demand because of strong economic conditions and no new supplies. It wouldn't take a rocket scientist to say we were going to be here."

The nation's refineries, meanwhile, are operating at full tilt. Because of tight environmental restrictions and poor returns on investment, the industry has had trouble keeping up with demand in a country where gas-guzzling sport utility vehicles are the top sellers.

Both home heating oil and diesel stocks are low because refiners tried to capitalize on strong gasoline prices rather than switch their operations over to these other products.

There are some positive developments on the horizon.

"We think there's a lot of oil on the high seas that over the next several weeks will be arriving here," Yergin noted.

After being moribund for several years, domestic drilling activity is hot, with most of the drillers seeking natural gas.

The nation's drilling-rig count, as reported by Houston's Baker Hughes, is at its highest level since late 1997. At the same time, the rate at which new gas wells are coming into production could be the highest in 15 years, the Energy Department said.

And on Oct. 30, the new Alliance Pipeline is to begin supplying more than 1.3 billion cubic feet of natural gas a day from Western Canada to the Midwest.

Analysts saw it coming The negative factors hitting U.S. consumers come as no surprise to government energy analysts. But they could do little more than prod and cajole.

"The Energy Department has done a good job of alerting people," noted Bill White, a former deputy energy secretary.

"The problem is that the Energy Department itself has ... very few policy tools to deal with the problem," said White. Created in 1977 in the wake of the Arab Oil Embargo, the energy secretary was envisioned to be an adviser who could weigh in on matters affecting the nation's energy security at the highest level of government.

But many of the areas affecting the nation's energy production -- leasing of federal lands for exploration, tax policy and, perhaps most important, environmental regulation -- are handled by other parts of the government, noted White, now head of Wedge Group, a Houston-based investment firm.

"It is sometimes said that the most important energy legislation that we had in decades was the Clean Air Act," said James Schlesinger, the nation's first energy secretary, now with Lehman Brothers.

For example, the cost of upgrading refineries to meet more stringent environmental laws, combined with years when refiners earned little or no profit, forced many smaller and older operators out of business.

The energy secretary does have some power on the diplomatic front. Current U.S. Energy Secretary Bill Richardson used his international contacts to some effect to persuade the OPEC producers to boost their production.

Richardson declined to be interviewed for this story.

Possibly the biggest weapon in the Energy Department's policy arsenal is the Strategic Petroleum Reserve, the nation's emergency oil stockpile.

Faced with a crisis, the government can dip into the reserve and bring new oil to the market.

So far, the administration has ignored calls to take such a step.

Sources close to the administration say officials at the Energy Department urged Clinton earlier this year to tap into the Strategic Petroleum Reserve. But they were overruled by the Treasury Department.

Houston Chronicle reporter Michael Davis contributed to this story.

http://www.chron.com/cs/CDA/story.hts/metropolitan/670583

-- Martin Thompson (mthom1927@aol.com), September 18, 2000

Answers

Whatta Mess! Keep up the great job Martin!!!

-- Carl Jenkins (Somewherepress@aol.com), September 18, 2000.

Seems to get worse by the minute.

-- Martin Thompson (mthom1927@aol.com), September 18, 2000.

Ironic, but this is the first time that I can ever remember that Saddam Insane is in a better position to manipulate the world economy than Alan Greenspan.

-- Chance (fruitloops@hotmail.com), September 18, 2000.

Yup! If Saddam turns off the oil spigot in Iraq, the crunch is so close to the vest that Greenspan's influence over world monetary policy will be nil.

Sad, sad, sad.

-- Uncle Fred (dogboy45@bigfoot.com), September 18, 2000.

I wonder how many people realize it, but it seems like Saddam is playing us like a fiddle, and now has us in the palm of his hand.

-- LillyLP (lilly LP@aol.com), September 18, 2000.

Iraq has little to do with causing this
situation. The article failed to mention
the record number of refinery outages
since January. Or even more to the point,
why these outages followed the predictions
of Chevron, Exxon and Mobil last year when
they were explaining how Y2K was going to hit
them hard.

-- spider (spider0@usa.net), September 19, 2000.