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High Oil Prices Raise Fears of Inflation

As oil prices continue to rise worldwide, economists fear widespread inflation well beyond the transportation sector. As VOA's Greg Flakus reports from Houston, chemicals derived from petroleum are found in many common products that are now becoming more expensive.

The price of just about everything is going up because the price of oil is going up. People around the world have already seen transportation and food prices rise dramatically. But now chemical companies are raising prices for a wide range of common products that are produced, at least in part, from oil or natural gas.

Last week several chemical companies announced price increases above 20 percent because of higher energy and raw material costs. Ken Medlock, an energy specialist at Rice University's Baker Institute here in Houston, says consumers are likely to see higher prices at local stores.

"This is typical of cost-push inflation. Basically, what is happening is the cost of making the products is going up and so that, ultimately, has to get passed on to the consumer," he said.

Many basic products found around the typical home contain chemicals derived from petroleum. Benzene, for example, is used for adhesives and latex paint. Ethylene is used in insulation and packaging. Propylene is found in carpets, plastic bottles, compact discs and rubbing alcohol. Medlock says most people do not realize that much of any given barrel of oil goes to these products.

"When we refine oil about 45 percent of it, on average, is gasoline. The rest is a host of other products and, depending on what you are making, you will have demand for one of those products."

Last week an analyst for the Morgan Stanley financial firm startled the markets by predicting a barrel of crude would sell for above 150 dollars by the fourth of July. Ken Medlock says the price of petroleum is likely to continue on its upward trajectory for some time, but he also thinks diminished demand will eventually cause energy prices to start back down.

Medlock notes that there has been a reduction in use of transportation fuel in both the United States and Europe as a result of the high cost and he says moves by some Asian nations to reduce subsidies will have a similar effect.

"They won't just completely drop the subsidy because that would mean very rapid inflation in those countries, but if they do relax the subsidy somewhat you will see prices elevate in those countries and consumers there will respond by consuming less. Then the demand driver for high prices goes away and that could be, by itself, the signal that sort of pops the bubble, if you will."

He says the US market soon should show the effect of increased supply following the suspension of deliveries to the Strategic Petroleum Reserve, a network of underground storage facilities in Texas and Louisiana where the government maintains oil for emergency use.

"We were injecting 70,000-barrels-a-day into the Strategic Petroleum Reserve. That oil that was being injected has got to go somewhere, so you could potentially see inventories grow in the next few months."

Medlock thinks the price of oil may drop back below 100 dollars a barrel by sometime next year, but he does not expect prices to go much lower because worldwide demand is still likely to outpace production capacity in the years to come.