'Shortage psychology' keeping oil prices high

WASHINGTON — Growing global demand for oil and the fear of supply disruptions have created a "shortage psychology" that is helping keep fuel prices high, a leading energy analyst told Congress on Wednesday.

Many speculators now are convinced the world is "running out of oil," Daniel Yergin said at a Joint Economic Committee hearing. "As prices go up, this psychology becomes self-reinforcing," sending prices higher still — at least until consumption patterns change dramatically.

"We are in an oil shock," said Yergin, chairman of Cambridge Energy Research Associates, a consulting firm. "Four years ago, oil was around $40 a barrel. Today, it is over $135 a barrel and there are alarming predictions of $200 and $250 a barrel."

Shortly before Yergin testified, the government released a long-term energy forecast that suggested price pressures would continue building for a long time. The federal Energy Information Administration predicted global demand for energy would grow by 50 percent over two decades.

The biggest jumps in demand will come from China and other emerging economies, which will use 85 percent more energy by 2030, the forecast said. "Global energy demand grows despite the sustained high world oil prices that are projected to persist over the long term," the report said.

But Yergin, the Pulitzer Prize-winning author of "The Prize," a definitive history of the oil industry, said tight supplies and speculation aren't the only factors driving oil prices. The mortgage crisis has helped push interest rates lower, which in turn has led to a weaker dollar, he noted. A cheap dollar drives up the cost of foreign oil for Americans.

The best way out of this jam is to cut consumption and produce more energy, he said.

"Prices do not usually go straight up forever," Yergin said. "Markets respond to higher prices with behavioral changes, innovation and substitution, and we are beginning to see that response."

Yergin said Americans are now starting to change their driving behavior, which may help lower oil prices. "In our view, 2007 may well have been the top, the peak, in terms of U.S. gasoline demand," he said.

The average nationwide price for a gallon of unleaded gas was down slightly to $4.067 on Wednesday, according to AAA. The record price of $4.08 was reached June 16, the auto club said.

Yergin urged Congress to pass measures that would boost the use of renewable energy, find new oil supplies and dramatically increase fuel efficiency. He cautioned against counting on a quick technological breakthrough.

"Alternatives and renewables have and should have an important role to play in our energy economy, and their role will grow," he said. "But the timing and scale remain uncertain."

Congress has held dozens of hearings this year to explore oil price hikes as constituents' complaints have grown. At least nine bills have been introduced just to address oil market speculation.

JEC Chairman Sen. Charles Schumer, D-N.Y., called this latest hearing to examine whether soaring oil prices represent a short-term "bubble" or a "new reality."

"I think everyone would like to believe that high oil prices are a bubble, but they might not be," said Schumer. Today's high prices must be fought with a long-term conservation strategy, he said.

"We must address the demand side of the oil equation," Schumer said.

Marilyn Geewax is a Washington correspondent for Cox Newspapers.