January 20, 2003 Monday

SECTION: front; Pg. A1

LENGTH: 1706 words

HEADLINE:
IF WE GO TO WAR THE STATE STANDS TO GAIN,
BUT AT A PRICE

BYLINE: Dana Bieber

BODY:
   ed5@wyomingnews.com

   c2003, Wyoming Tribune-Eagle

   CHEYENNE -- It's April 5, 2003.

   The United States has been at war with Iraq for two weeks.

   It's clear the war will end soon.

   A popular Iraqi official has been found to replace Saddam Hussein. Casualties to the U.S. military and Iraqis are minimal, and Iraq's oil fields are intact.

   Oil prices that rose more than $20 a barrel at the beginning of the war already have dropped and are expected to soon reach pre-war-hysteria prices.

   Some experts say such a rosy scenario, if the United States goes to war, would be the most profitable one for Wyoming's state revenue: a short, sweet war that elevates minerals prices for a brief period but doesn't debilitate the U.S. economy.

   Whatever the scenario -- good or bad -- the implications of war are great for the Cowboy State, which relies on minerals taxes to supply at least 40 percent of its revenue, said state Rep. Roy Cohee, R-Casper, chairman of the House Revenue Committee.

   In 2002 the state earned $750 million from oil, coal and coal-bed methane, according to the Wyoming Department of Revenue. Here's the breakdown:

   About $128 million came from severance taxes on coal-bed methane production, which was 1.5 billion mcf (thousand cubic feet).

   About $110 million came from severance tax on coal, which produced 360 million tons.

   About $55 million came from oil, which produced 54 million barrels.

   About $450 million was collected by the counties in property taxes.

   "We're kind of an odd state," Cohee said, referring to the fact that few states make money during times of war. "Wyoming is tremendously lucky to have the mineral wealth it does."

   Jason Shogren, an economics professor at the University of Wyoming, would agree.

   Wyoming -- in terms of state revenue -- does best in a crisis, he said. Take, for example, the energy crises during late 1970s and in 2001. The state benefited but consumers' pocketbooks were hurt, causing a downturn.

   "If oil prices rise, it will be good for Wyoming, but it will hurt the national economy because the cost of transportation will increase," said Tom Stroock, CEO of Alpha Development Corp., a producer of oil and gas in Wyoming for more than 50 years.

   "Gas is not as price-elastic as other commodities because there's a basic amount of transportation people have to use."

   Rising energy prices have a domino effect on the economy, said financial adviser Kevin Guille, who works for Raymond James Financial Service in Cheyenne.

   Essentially, consumers and businesses stop spending, he said, adding that the lack of spending feeds on itself, eventually leading to layoffs and even less spending.

   So most states that rely on income taxes probably will lose revenue if a recession and high unemployment result.

   But for Wyoming, the higher the energy prices rise, the more money the state reaps. That means more funding for Wyoming schools, roads, health care, public safety and family services, Shogren said.

   Why oil matters

   Although the state is a small producer of oil, it's the largest
producer of coal in North America. And it's one of the top producers of coal-bed methane.

   Oil prices influence natural gas and coal prices, said William Watson, who tracks coal prices for the Energy Information Administration, a division of the U.S. Department of Energy.

   "If the war goes bad, you'd better believe that energy prices, including coal, will rise," he said.

   Big users of oil can switch to natural gas, and big users of natural gas can switch to coal, Watson explained.

   So if oil prices skyrocket, oil users will switch to natural gas. This, in turn, will drive up the demand for that fuel, causing a spike in prices. If the prices rise high enough, he said, big users of natural gas will switch to coal.

   This would drive up the demand for the minerals and, consequently, the prices, he added.

   Already minerals prices, including coal, are higher than average. The average price for coal is about $5 a ton. Right now, it's running about $6.25 a ton, said Randy Bolles, administrator of the Minerals Tax Division of the Wyoming Department of Revenue.

   This spike is not necessarily attributable to pre-war jitters, he said. It's winter, and more power plants from the East Coast are being forced to buy cleaner-burning coal, which they can get from Wyoming, he said.

   Oil is up to $31-$32 a barrel. The average runs between $20 and $25. Coal-bed methane averages about $2 mcf, but it's being priced at about $2.80 mcf.

   "Currently, oil stocks are very low, and gas storage has been dropping because this winter has been colder than normal to date," said Don Likwartz, the oil and gas supervisor for the Wyoming Oil and Gas Conservation.

   "This means oil and gas prices probably would move in tandem if a war with Iraq took place in February and early April."

   Likwartz said he doesn't think prices would rise much for natural gas and coal if the war starts in the spring, when the energy demand for heating homes is lower. But if the war is long, he agrees that prices could rise.

   The conflict in Venezuela, which was producing 9 percent of U.S. oil, hasn't helped matters. The 1.5 million barrels shipped to the United States every day have been waylaid by a revolution there.

   Jim Thompson, an Energy Information Administration natural gas analyst, said, "If and when a war breaks out, oil and gas prices will spike initially because of the uncertainty of supply and demand."

   The situation in Venezuela has increased the uncertainty of a stable oil supply, despite the fact that Saudi Arabia has promised to pick up the slack. When certainty is renewed, prices will drop, he said.

   Bill Bradley, the head of UW's Ag Department, said he doesn't think Wyoming's coal and gas will be impacted much if the war is "short and sweet." But if it goes badly, the outcome could be vastly different, he said.

   Pessimistic war scenario

   What does a war gone bad mean? Bradley describes a possible scenario:

   The war is long. Casualties are high. Intelligence is politically cooked. The Iraqis put up a fight when the war does end and it's a messy cleanup -- politically and physically. There is fighting after Iraq loses. The regime change occurs, but the new leader can't control the country. Iraq is unstable. It's a bad place for investment. Oil facilities are sabotaged. There's a shortage in the world market. Venezuela doesn't come back on line.

   Under this scenario, Bradley said, oil prices could reach up to $40 or $50 a barrel.

   "(Natural gas and coal) prices would increase, but it wouldn't last for very long," he said.

   The United States would end up shifting its sources in the energy world away from getting its oil from the Middle East. It would look to Russia, Algeria, Nigeria, Mexico -- countries that have big reserves.

   "The outcome is very complex," Bradley said.

   Watson, who tracked energy prices for Saudi Arabia's finance ministry during the Gulf War, agrees with Bradley's pessimistic war scenario outcome.

   But he said coal and natural gas prices would stay up for six months to two years until oil production reached full capacity.

   Coal prices could increase 50 percent, from $5 a ton to as high as $8 a ton, Watson said. Natural gas prices could rise from $2 to $3 mcf to $5 mcf.

   "If you look at our experience during the Gulf War, oil prices spiked up at the end of 1990 in anticipation of war," Watson said. "Two weeks into the bombing, it was clear that the war was going to be short. And 24 hours after land invasion, oil prices came down to what they were before the war hysteria set in."

   Oil prices before the pre-war hysteria were between $13 and $15 a barrel, but they shot up to low-$30s as the war started, Bolles said. Natural gas prices went up a little bit, but coal prices didn't move at all.

   Bolles said Wyoming saw an increase in mineral tax revenue during the early 1990s.

   In 1990 and 1991, the state earned about $250 million from severance taxes on oil, gas and natural gas compared with about $223 million in 1989. These numbers don't reflect money collected from ad valorem (property) taxes on minerals. Severance tax earnings dropped back in 1991 to about $226 million.

   Budget in the balance

   Year to year, Wyoming doesn't know what its budget will be because almost half of it hinges on minerals prices, Cohee said.

   "So it's very difficult to budget," he said.

   Should the war be short and minerals prices fall lower than their levels before pre-war, the state could experience a fiscal shortfall.

   Cohee recalled 1994, when oil prices dropped to $6 and $7 a barrel.

   "It was a tremendous setback to the state, which had less than 12 months to prepare," he said. "And we're hardly prepared now should (mineral revenues) contract 10 to 15 percent."

   If past actions are any indication, energy prices could be driven down if the war is short, said Philip Roberts, who has taught history at the University of Wyoming since 1990.

   "Wyoming's economy would be adversely affected," he said. "It all depends on the world oil price how the war will influence that price."

   All that can be done right now, said Gov. Dave Freudenthal in a prepared statement, is to monitor the circumstance and keep up with the information.

   Other leaders, such as U.S. Rep. Barbara Cubin and U.S. Sen. Craig Thomas, both R-Wyo., didn't reply to requests for interviews.

   U.S. Sen. Mike Enzi, R-Wyo., said that although the state may benefit, he would rather see the daughters and sons of Wyoming and the rest of the country remain out of harm's way.

   Below are approximate earnings the state received in severance and ad valorem taxes on oil, coal-bed methane and coal since 1990:
   2002: $750 million

   2001: $568 million

   2000: $740 million

   1999: $461 million

   1998: $395 million

   1997: $468 million

   1996: $460 million

   1995: $388 million

   1994: $400 million

   1993: $426 million

   1992: $451 million

   1991: $454 million

   1990: $512 million

   Source: Wyoming Department of Revenue.


   GRAPHIC: The Associated Press    A soldier in III Corps Artillery's 15th Transportation Company issilhouetted in the fog against a motor pool floodlight as he prepares todepart Fort Sill, Okla., early Tuesday in support of U.S Central Command'sArea of Responsibility. For security reasons, their destination was notreleased.

LOAD-DATE: January 20, 2003

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