Thanks to Iraq's invasion of Kuwait, oil-rich Alaska may reap a $1 billion windfall in surplus revenues and even more if war breaks out, state officials said Wednesday.

"We expect a windfall," said Gov. Walter Hickel, who is already plotting major development projects for the money.Alaska's surplus earnings may climb as high as $2 billion, according to state budget officials and revenue reports.

So, while Americans pay higher prices for gasoline and ponder the possibility of U.S. troops going to war in the Persian Gulf, Alaska seems well on its way to striking a bonanza.

Alaska, which is the nation's biggest oil producing state and supplies one-fourth of all domestic output, is as dependent on oil earnings as Americans are dependent on oil.

With 85 percent of all state revenues derived from oil, higher oil prices and increased production have filled the treasury and topped it off with the growing surplus.

Alaska oil producers have increased their output since the Iraqi invasion and production has risen to 2 million barrels daily, its highest level in two years.

Just how rich Alaska gets depends on Iraqi President Saddam Hussein's actions and President Bush's reactions.

Because Alaska is so dependent on oil, state petroleum economists regularly issue revenue forecasts so budget-makers know how much there will be to spend.

Until now, the state oil economists have based their predictions on three scenarios for the price of oil - low, middle and high. However, the latest state revenue forecast rejects this system in favor of "peace, limited war and extended war" scenarios.

The forecast gives no more weight to the peace scenario than it does to the two war scenarios. "We're not trying to make any kind of prediction on the outcome of war," state petroleum economist Chuck Logsdon said.

According to the report, Saudi Arabian oil, which is the basis for world oil prices, will cost $23 a barrel next year if there is peace, $29 a barrel if there is a limited war, and more than $35 a barrel if major military action disrupts regional oil production in the Middle East.

Logsdon rejects predictions by some that war would shoot oil prices to as high as $100 per barrel.

Still, the state surplus could reach $2.8 billion if war breaks out, the report said.

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(Additional information)

Gulf news drop oil prices

Oil prices fell more than $1 a barrel early Thursday after Iraqi President Saddam Hussein said he would free all foreign hostages held in Iraq and occupied Kuwait. On the New York Mercantile Exchange, the American benchmark West Texas Intermediate crude futures contract for January delivery had fallen $1.44 in morning trading to $25.85 a barrel after selling as low as $25.25 a barrel.