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Economist Blames Subsidies for Oil Price Hike

Tue, 09/05/2006 - 6:38am

Artificial demand for oil created by government subsidies and financial market speculation are key contributors to the volatility of crude prices, an energy economist told a chemical industry gathering recently. The artificial demand, which is caused by government subsidizing the cost of oil for consumers for political gain, constitutes 10-20 percent of the cost of oil, said Michelle Foss of the Center for Energy Economics at the University of Texas. Financial speculation has added 15-20 percent to the current price of oil, she said. "We have an overpriced commodity, and this is going to be around for a while," Foss said. "The guessing game now is: Where is the new floor for oil?" The U.S. Department of Energy, other analysts and even futures markets have a poor record for forecasting oil prices, she said, leaving industrial companies in a difficult position to anticipate costs. Despite the uncertainty, she said, the most likely scenario is oil prices in the $45-$60/bbl range during the next three years. New projects coming onstream will boost supply and oil's unaffordability will impact the economy enough to reduce demand, she said. Foss spoke at a seminar on energy reduction hosted by Praxair in Houston.

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