'Psychology Of Shortage' Remains In Oil Markets

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Oil prices are down from record highs that they reached earlier this year. But there's still a "psychology of shortage" in the oil markets. Renee Montagne turns to Daniel Yergin, head of Cambridge Energy Research Associates, to talk more about this concept.


And oil is trading today at about $125 a barrel. That's much lower than the mind-boggling record reached in July of more than $147. But prices are still high because there's still what some would call a psychology of shortage in the market. To talk about this, we turn to Daniel Yergin. He heads the consulting firm Cambridge Energy Research Associates.

Dr. DANIEL YERGIN (Director, Cambridge Energy Research Associates): It really means an expectation that not only we're going to have tight markets, but a long period of very tight markets and finally, shortage. And there's been for the last year or so this feeling that around 2012 or 2013 we run into a real crunch. And it's really this specter of tens of millions of Chinese buying SUVs in the year 2012 or 2013 that's been the kind of underlying image in the mind of the oil market.

MONTAGNE: Are investors overreacting to this question of a possible or a likely shortage?

Dr. YERGIN: I think as we saw oil prices go over $140 a barrel, there was a psychology that had gripped the market, this notion that there was a shortage. And that's all the market was focusing on.

I think the other thing that was happening - when the credit crisis started a year ago, that's when you started to see oil prices and other prices take off. And the reason was that interest rates were being cut. The dollar started to weaken more, and as the dollar went down, investors turned to oil and other commodities, really, as a hedge against a falling dollar.

And when you look at the charts, you can see that if investors did that, they weathered this credit-crisis storm better than those who didn't. In some ways, you can say that oil today is the new gold. It's a hedge against a weaker dollar and against uncertainty and risk in the world.

MONTAGNE: We've just been talking about the psychology of shortage. What about the psychology of, oh, whoa, the prices are starting to go down a bit now, which they are. Will the momentum be reduced for a change in public policy…

Dr. YERGIN: Well, that's the $64 billion question as the automobile makers retool because, of course, that did happen in the past. In the late 1990s, when you adjust for inflation, gasoline was cheaper than it had ever been in American history. And that's the moment, really, when the passion with SUVs became the most notable part of America's love affair with the automobile.

But I think that unless prices really drop substantially, I think there is a change in the mind of consumers, and there is a change in public policy, which already began with the first new increase in fuel-efficiency standards in 32 years.

MONTAGNE: So how far would gas, for instance, or the price of oil have to go down for people to say, oh, well, let's party like it's, you know, 1999?

Dr. YERGIN: Well, I think if we were suddenly back in the world of $2 gasoline or $1.80 gasoline, I think this would fade away - not overnight, because people would remember it. They'd be worried about it's going to happen again. There's still the momentum in terms of public policy. But over time, if we were back in a world of low gasoline prices, this would fade as something that people are focusing on.

But some things are locked in, and those fuel-efficiency standards are locked in, and they're going to unfold whatever the price of gasoline is.

MONTAGNE: Thank you very much for joining us to talk about this.

Dr. YERGIN: Thank you.

MONTAGNE: Daniel Yergin runs Cambridge Energy Research Associates, and he's author of "The Prize: The Epic Quest for Oil, Money and Power."

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