Oil Volatile as Markets not Well Supplied: BP CEO

Oil prices are unstable because markets are not well supplied, and higher taxes in producing countries are not conducive to investing in new output, the head of energy major BPsaid on Monday.

"In a well functioning market where supply and demand are balanced, prices should be stable. Where prices are high, however, they show that supply is not responding adequately to rising demand ... and that is where we find ourselves today," CEO Tony Hayward told an oil and gas conference in the Malaysian capital.

Oil prices soared more than $11 a barrel on Friday, their biggest one-day gain ever, hitting an all-time high of $139.12 on the back of a weak U.S. dollar and mounting tensions between Israel and Iran.

"The taxes governments take from the oil and gas industry have continued to increase across the world. I believe this is unsustainable and counterproductive. All it means is that you have less money to invest in new production," Hayward told the Asia Oil and Gas Conference.

Hayward also criticised the use of subsidies to protect consumers from surging oil prices and said falling gasoline demand in recent months shows that consumers are responding to price rises and that the market is working.

"In a high price environment, I don't believe these subsidies are sustainable. Not only do they put pressure on public finances they also discourage sensible fuel efficiency measures," Hayward said.

Malaysia, which uses some of its huge oil and natural gas export revenues to subsidise some of the cheapest fuel prices in Asia, raised petrol prices by 41 percent and diesel by 63 percent last week, pledging to bring pump rates into line with international prices within the next few months.

Hayward's comments came a week after Royal Dutch Shell <RDSa.L> Chief Executive Jeroen van der Veer said he did not see any shortage of physical oil supplies and that price volatility had a lot to do with psychology.

Hayward said BP would invest $22 billion this year on new production, upgrading refineries and investing in alternative forms of energy, an increase of nearly 15 percent on 2007.