Economist Blames Subsidies for Oil Price Hike

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.