EIA: Oil to Average $85 a Barrel in 2008

Oil prices are expected to jump more than 18 percent per barrel in 2008 as speculators continue flocking to markets with tighter supplies and increased demand, the head of the Energy Department's forecasting arm told lawmakers Tuesday.

"Speculators and others have moved toward investing in oil markets because of tight fundamentals," Energy Information Administrator Guy Caruso said. "In other words, high oil prices are likely to be increasing participation by non-commercial traders, rather than the other way around."

The average price of crude oil was $66 in 2006, is expected to rise to $72 this year and will reach $85 a barrel in 2008, Caruso said in testimony prepared for a joint hearing of the Senate's permanent subcommittee on investigations and the subcommittee on energy that's focusing on speculation's role in the recent oil-price surge.

Light, sweet crude for January delivery rose $1.81 to $89.67 a barrel in midday trading on the New York Mercantile Exchange. That's down nearly $10 a barrel from the all-time high of $99.29 set last month, but still well above the year-ago price of roughly $61 a barrel.

At the pump, meanwhile, gas prices fell less than a penny to a national average of $3 a gallon Tuesday, according to AAA and the Oil Price Information Service. Gas prices have fallen more than 10 cents from a November peak when oil flirted with $100 a barrel, but remain well above the year-ago average of $2.30 a gallon.

Last month, Caruso predicted that oil prices would retreat to around $80 per barrel next year based on assumptions about new supplies and limited growth in demand. But he also said then that heavy speculative trading of oil futures on Wall Street _ along with the possibility of supply disruptions in Nigeria, Russia and beyond _ would keep prices volatile.

On Tuesday, Caruso added low global excess refining capacity and the dollar's declining value against other currencies as factors supporting continued oil consumption growth.

"With this increased uncertainty, commercial producers and consumers of energy increased their desire to hedge their risk," Caruso said. "With this increased desire to shed risk, there was a much larger role in the market for those prepared to bear this risk."

Oil futures contracts held by speculators recently have risen to nearly 45 percent, Sen. Carl Levin, D-Mich., said Tuesday.

"A fair price is a price that accurately reflects the forces of supply and demand for a commodity, not the trading strategies of speculators who only are in the market to make a profit for themselves by the buying and selling of paper contracts with no intent to actually purchase, deliver, or transfer the commodity," he said.

Philip Verleger, oil economist and president of consulting firm PK Verleger, said the Bush administration's policy of adding to the Strategic Petroleum Reserve mostly is to blame for the recent rise in oil prices. The reserve is a system of salt caverns along the Louisiana and Texas coast that contains about 694 million barrels of oil to be used in a supply emergency. It has a capacity of 727 million barrels that the government is working to fill.

The Energy Department's actions may have added "as much as 10 percent to the light sweet crude price," Verleger said. Levin and other Democrats also blasted the administration for not at least postponing additions to the reserve in an effort to alleviate the pressure on prices.

Levin, who chairs the investigations subcommittee, and others have introduced legislation designed to close the so-called "Enron loophole" that allows electronic energy exchanges to operate outside federal regulation.

An investigation this year by the subcommittee found that hedge fund Amaranth Advisors LLC, which collapsed last year after losing more than $6 billion in natural gas trades, had shifted its activities to an unregulated electronic exchange to avoid trading limits, and that this "excessive speculation" raised homeowners' heating bills.

While energy-trading data from the Nymex is monitored by the federal Commodity Futures Trading Commission, the agency in October asked Congress to give it greater oversight of electronic exchanges to help deter potential price distortion and manipulation.