IEA's Birol says costs, subsidies to push oil rise

Tue Sep 14, 2010 3:47pm GMT
 

* Oil prices may rise on economic recovery, Birol says

* High production costs, gov't subsidies to boost prices

MONTREAL, Sept 14 (Reuters) - Oil prices are likely to rise when the global economy rebounds and demand increases, the International Energy Agency's chief economist said on Tuesday, noting the era of low-cost crude is over, thanks to rising production costs and government subsidies.

Fatih Birol said the high cost of producing new oil supplies from unconventional reserves such as the oil sands will push up prices. As well, rising prices will not cut growing demand in emerging economies, because government subsidies shelter consumers from price pressures.

"On the supply side the cheap oil era is over," Birol told reporters following a speech to the World Energy Congress in Montreal.

"The bulk of cheap oil in the (industrialized) countries has been exploited and what is left is deepwater offshore and the oil sands in Canada, which require higher price levels in order to be profitable," he said.

Oil demand in industrialized countries has peaked and is rising only in emerging economies such as China, the Middle East and India where consumers are sheltered from higher prices. Those subsidies mean consumption isn't pressured lower when prices rise.

"Subsidies in the major demand centers hinder the price signals," Birol said. "Either we phase out those price subsidies and make price signals go to the consumers or we need higher price signals."

Birol said that unless subsidies are phased out, prices are likely to rise once the global economy recovers.

"With the current policies in place we may see higher price levels," he said. (Reporting by Scott Haggett; editing by Rob Wilson)

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