Energy chief: Flat production behind oil prices

[June 07, 2008]  AOMORI, Japan (AP) -- Nations should fight rising oil prices by cutting subsidies and vastly increasing investment in energy, while oil-producing countries need to ramp up output and divulge more information about how much they produce, the U.S. energy secretary said Saturday.

Samuel Bodman, attending two days of meetings in northern Japan among energy chiefs from Group of Eight industrialized countries and other top economies, said the surge in world oil prices was largely a simple problem of supply and demand.

Production has stalled since 2005 at 85 million barrels a day, while economic growth - particularly in China and India - has pushed demand ever higher, Bodman said before a meeting of ministers from the U.S., Japan, South Korea, India and China.

"We're in a difficult position where we have a lid on production and we have increasing demand in the world," he told a small group of reporters, dismissing the effects of speculation and unclear inventory levels and other factors on oil prices.

"I would devoutly hope we ... see a reduction of the use of oil in the world on the one hand, and an increase in the supply so we can see some mitigation in the pressure on price," Bodman said.

Oil prices made their biggest single-day surge on Friday, soaring $11 to $138.54 on the New York Mercantile Exchange, an 8 percent increase. That followed a $5.50 increase the day before, taking oil futures more than 13 percent higher in just two days.

While demand has increased as supply has stalled, analysts have also cited the decline of the U.S. dollar, fears about the long-term supply of oil, and aggressive speculation as factors in rising prices.

Bodman said he would likely urge China and other countries at the Japan meeting to slash fuel subsidies, which make gasoline cheaper for consumers - thereby giving them no reason to reduce consumption and allow prices to level off or drop. The International Energy Agency has estimated that oil subsidies in China, India and the Middle East in 2007 totaled some $55 billion.

At the same time, he urged nations to pay heed to an IEA report that the world needs $22 trillion investment in energy supply infrastructure by 2030 to meet rising demand, while developing alternative energy sources.

"We have a situation where we have these high prices and the only solution is to diversify your resources, diversify your sources of fuel," he said, listing nuclear energy, natural gas and renewable sources such as wind and hydropower.

Lack of transparency in the oil market has also been cited as a possible cause of higher prices. Bodman said that while the United States and host Japan have been "diligent" in disclosing production and consumption data, some other countries need to do more.

Proponents of such transparency, including the IEA, say greater disclosure of accurate statistics helps markets set prices that more precisely reflect supply and demand. Underreporting of production, for instance, can drive prices higher as traders think supply is lower than it actually is.

Rising prices were having a negative effect on world economies. The U.S. government, for instance, reported on Friday the nation's unemployment rate rose to 5.5 percent in May, a monthly rise of half a percentage point, the biggest in 22 years.

Bodman said economic troubles because of high prices would only hurt oil producers.

"It's not good for producing nations to see the U.S. struggling economically. They depend on us to be a significant engine in world economic activity," Bodman said.

[Associated Press; By JOSEPH COLEMAN]

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