Crude Oil Prices: Not going down any time soon
Research firms continue to raise their forecasts for the price of crude oil given the dramatic and sustained rise in prices observed in recent times. Prices are now expected to stay above $100 through 2010. Prices are remaining high even though demand in the developed world is flat, and perhaps even declining with the current slowdown in the US, which by itself is responsible for 25 per cent of global consumption. This is being more than offset by strong demand growth in the developing world. Part of the reason that demand growth has remained so strong in developing economies despite the rapid rise in crude oil prices is due to the fact that gasoline and diesel prices are subsidized in some of these countries. For example, the Chinese government fixes the price of transportation fuels to such an extent that the refiners cannot be profitable in today's high-crude environment. The refiners are then compensated in the form of rebates from the Chinese government, which in 2007 amounted to about $45 billion or 1.1 per cent of GDP. It is expected that the Chinese government will continue this practice, viewing the cost as manageable in order to retain high growth in the broader economy. (Interestingly, on June 20 the Chinese government announced that the price for gasoline and diesel would be increased by 18 per cent in response to high crude oil prices.) A number of other developing countries follow similar policies, although some are currently in the process of removing the subsidy.

Source: Chemicals Newsletter # 26, John Margeson, Industry Canada www.ic.gc.ca/chemicals