Sunday, May 01, 2005

Daniel Yergin comes clean on Oil Prices

Here is an interview with Daniel Yergin, which originally appeared in the TIME magazine. Excerpts:
Q: Will oil prices remain this high?

A: We've entered a new era of oil prices. It sneaked up on people, but now it's all too evident. There is a new floor under the price of oil of around $40 a barrel. I'm struck that the oil market today is tighter than it was on the eve of the 1973 crisis. And with markets this tight, you'll see a lot more volatility, and you could see prices spike up as high as $65 to $80. How high they go depends on geopolitics and market psychology.

Q: To what extent is the U.S. economy at risk from higher oil prices?

A: Right now there's this accommodationist view of high oil prices. People are looking at global and U.S. growth and saying, 'Well, these high prices are having less impact than might have been anticipated.' And it's true that oil does not have as much leverage on our economy as it did in the '70s. We use half as much oil per unit of GDP as we did then. But when you have sustained prices of more than $50 a barrel, the economic impact will be larger than people have anticipated.
Considering that CERA is generally on the conservative side when making predictions about price for oil, Yergin's statement that 40 dollar a barrel is a floor should be, IMHO, underlined.

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