Enron Mail

Subject:CSIS Watch October 6, 2000 Number 235
Date:Fri, 6 Oct 2000 09:12:00 -0700 (PDT)

This message contains the latest issue of the CSIS Watch, focusing on Energy
Trends and Geopolitics.

For further information, contact the CSIS Director of Studies Office at
202-887-0200, or reply to this e-mail.

Energy Trends and Geopolitics.

The OPEC heads-of-state summit should be appraised on three different levels,
according to Luis Giusti, CSIS senior adviser. Despite speculation that
decisions about the market would be forthcoming, nothing was bound to happen
because the operational agenda will be dealt with in the organization's
meeting in November. At the institutional level, the summit was undoubtedly a
success for OPEC, as it clearly reinforced the spirit of the organization by
strengthening the union among member countries. Additionally, at the
political level the meeting provided a platform for Venezuelan president Hugo
Chavez to deliver what has become his "north-south" position and message. It
is important to keep in mind, though, that Saudi Arabia's dominance and
leadership will continue, by virtue of its high production capacity, and we
can expect continuity in its pragmatic approach toward the market and the
price of oil. As a result, Chavez's speeches should be viewed in perspective
and not overplayed.

As for the United States' release of 30 million barrels of oil from the
Strategic Petroleum Reserve (SPR), Giusti says that the move has clearly
provoked an immediate reaction in the desired direction, with oil prices
falling some $5 per barrel. In tapping the SPR at this moment, the U.S.
action denotes a mode of cooperation and not confrontation. OPEC countries
have already increased production significantly, and they have repeatedly
sent the message that they have done their part and somebody else has to do
something to bring down prices. The move comes too late, however, to bring
any relief to the winter's tight oil heating situation: aside from the fact
that the U.S. refining network is operating at practically full capacity, the
oil released will not be refined before December, and, as a result, the
refined products will not start reaching the market before January. But the
move does have an effect on the price of oil, which is the root of the
problem. As for the Heating Oil Strategic Reserve currently being accrued,
its small size (2 million barrels) can have only a modest impact on prices.
Moreover, its triggering mechanism is not yet clear.

Robert Ebel, director of the CSIS Energy Program, thinks the United States
should not touch the reserve. Domestic oil producers are finally turning a
profit and will be unhappy as crude oil prices fall. Moreover, just-in-time
philosophies of operation keep stocks low, meaning the inventories simply
will not be there if demand rises sharply this winter despite the release of
reserves. Ebel suggests that New England take steps to diversify the kinds of
fuel consumed during the winter.

According to Ebel, the reserve withdraw is playing to the psychological part
of the market more than anything else. After the announcement of the reserve
withdraw, prices began to drop without a single new drop of oil entering the
marketplace. What will happen next August when it is time to replenish the
reserve, wonders Ebel.

Moreover, U.S. refineries are already operating at 95%-96% capacity daily. To
make room in the refineries for the reserve oil, the United States will have
to give up some of the oil it imports. This crowding out of imports will
bring down prices elsewhere, notes Ebel. The United States is therefore
subsidizing foreign consumers. Ebel says the United States should have
coordinated the reserve withdraw with other countries if it truly wanted to
have a global impact on prices.

Turning to Iraq, the high price of oil contributes to the erosion of the
sanctions in place. Iraqi oil now plays a key role in global supplies and
prices. This gives the Iraqi regime increased leverage, says Charles Duelfer,
a visiting fellow in the CSIS Middle East Program.

While Iraq is unlikely to actually halt its oil exports, the potential to do
so provides Iraq with a "deterrent force" of some significance. Iraq made
modest reductions in output earlier this year when the UN sanctions committee
delayed approval of funding for oil infrastructure repairs. The Iraqi regime
has a great appreciation of power-whether through weapons of mass destruction
or through oil. Iraq can be expected to take every opportunity to increase
its production capacity as circumstances permit, perhaps with an ultimate
goal of displacing Saudi Arabia as OPEC's dominant player.

- Watch 235.doc