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Going in Circles?

The chief executive of BP PLC, the world's third largest oil company, says high fuel prices around the globe are primarily the result of cyclical phenomena, not structural ones, that will be fixed by the forces of supply and demand.

The significant fall in gas prices since winter, when record highs spurred more drilling, is proof that "markets work," Sir John Browne said while discussing BP's annual statistical review of world energy markets.

"The greatest problems seem to occur in those areas where the market is hampered, where there is an absence of open competition and choice and where the signals imposed by regulation set the wrong incentives for both consumers and producers," Browne said, adding that there is no physical shortage of natural gas or crude oil.

The challenges, according to Browne, will be "how to remove the barriers which prevent the market from working effectively" -- among them drilling restrictions on federal lands, distribution bottlenecks and regulatory hurdles that raise the cost of upgrading pipelines and other infrastructure.

But, Browne conceded. as long as the political and physical barriers persist, prices are likely to remain volatile.

BP said U.S. energy consumption grew 1.8 percent in 2000, less than the overall economic growth rate. Energy use was moderated by high prices, said Browne, who predicted that the nation's economic slowdown will likely keep consumption growth in check.

Globally, the price of crude is likely to decline toward historical levels as recent profits are pumped back into exploration and production projects that increase supply. In 2000, the average price of a barrel of crude was up nearly 60 percent to $28.98 even as supply growth outpaced demand growth by a margin of nearly four to one. Much of that excess supply replenished worldwide oil inventories, which had dropped to insufficient levels in 1999.
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