Daniel Yergin joins other commentators who have said oil prices are not being driven by supply and demand. (image: cache.daylife.com)

“Oil prices today do not reflect the world’s supply and demand fundamentals.” That, in a nutshell, is energy expert Daniel Yergin’s assessment of why today’s $80 a barrel oil prices are double that of last year’s. On Monday Reuters reported that Yergin—who was awarded the Pulitzer Prize in 1992 for his book on the history of the global oil industry entitled The Prize: An Epic Quest for Oil, Money, and Power—attributes current oil prices to the weakness of the dollar and an overriding faith in economic recovery.

Yergin, who also possesses a PhD in International Relations from Cambridge and is the chairman of IHS Cambridge Energy Research Associates, Inc., agrees with many other renowned energy experts concerning the price of oil. On November 13 HeatingOil.com reported that energy expert Jason Schenker attributes the abnormally high cost of oil to optimistic investors who trade as though the economy is rapidly recovering and oil demand is high.

Commodities trader and analyst Stephen Schork, who is known for his unorthodox opinions on oil production and consumption, also agrees that oil prices are out of sync with supply and demand. However, Schork adds an interesting psychological element to interpreting the price of oil. According to HeatingOil.com, Schork attributes the price of oil to unfounded American beliefs that other countries, especially China, have begun consuming oil at unprecedented rates. The way Schork puts it, “the idea of a billion Chinese trading their Schwinns for Cadillac Escalades—I think that is what is driving the market.”

Also agreeing that oil prices are inconsistent with the laws of supply and demand is economics professor Nouriel Roubini. Professor Roubini has warned that such high prices are dangerous to economies that are only now beginning to shake the effects of last year’s economic crisis. Roubini, who predicted the crumbling housing market and subsequent credit crisis in 2006, has argued that what recovery has been achieved is in danger and “if oil goes to $100 today, it will have the same effect on the global economy as what $147 oil had last year.”

The current state of affairs surrounding oil prices has not shaken Dr. Yergin’s faith in supply and demand, though. Asserting that “the only two real characters that count are supply and demand,” Yergin is confident that the market will eventually correct itself, and that supply and demand “will win at the end of the day.”

And although Yergin’s analysis of crude oil prices is not entirely positive, he may have good news for consumers of diesel fuel and heating oil. According to Yergin, supplies of diesel and heating oil are remarkably abundant—when the market does correct itself, customers will receive significantly lower prices.