Yergin: traditional factors responsible for oil prices

One of the leading energy experts in the United States was expected to tell a congressional committee Wednesday that traditional economic factors were responsible for most of the run-up in oil prices and caution against looking for simplistic solutions to one of the world’s most complex markets.

Daniel Yergin, the chairman of Cambridge Energy Research Associates and a Pulitzer Prize winning author of a history of the oil industry, who was scheduled to testify before the Senate’s Joint Economic Committee, was expected to pour cold water on the momentum growing in Congress to blame only institutional investors for record high prices.
Commodity markets have become increasingly attractive for investors seeking to diversify their portfolios and who are looking for better returns than stocks, bonds or currencies. That growing integration of financial markets with the commercial oil market has provided a “significant” impetus to prices, according to a draft of Yergin’s prepared remarks.

But behind that trend, according to Yergin’s statement, there are a variety of factors that have facilitated the run-up, including insufficient investments in exploration and refining activities, soaring energy demand from Asia and a long list of supply disruptions.

These factors have left the global oil industry with very little capacity to increase oil supplies. There are now less than two million barrels a day of unused capacity, a safety cushion that has declined from about five million barrels a day in 2002.

“In a tight market, prices go up,” Yergin’s statement said. “And a tight market is also a market that is more crisis-prone, more vulnerable to the impact of disruptions.”

International Herald Tribune