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Dubai: Oil prices are expected to remain volatile as long as factors such as US-Iran tensions and the financial market turmoil that followed the American housing mortgage market crisis do not go away, an industry expert said on Tuesday.
The world's financial and oil markets are becoming increasing connected and oil prices are no longer driven by the fundamentals of supply and demand alone, said Daniel Yergin, chairman of US-based consultancy Cambridge Energy Research Associates (Cera).
Tensions between Iran and the West over the former's nuclear development have contributed to high global oil prices and affected investment in Iranian oil and gas projects.
"Iran continues to be a factor in oil prices and will continue to be a factor. There is also concern about the [weak] dollar," Yergin told Gulf News in an interview on the sidelines of the International Petro-leum Technology Conference in Dubai.
"A confrontation will not be good for the oil market and the global economy," he added.
The price of oil neared $100 per barrel last month, but has declined close to $89.
Powerful cycles
"The oil prices have gone as low as $50 and as high as $100 in less than a year. These are very powerful cycles," Yergin said.
A projection by Cera sees world oil demand growing 50 per cent in the next 25 years and at least half of that demand will be in Asia.
This is creating "deeper and intense" relations between the Gulf region and Asia, Yergin said.
There have been demands for the Organisation of Petroleum Exporting Countries (Opec) to increase crude production to stabilise prices, but Opec has argued that there is enough supply.
Yergin agreed that the oil markets may be tight but there has not been a physical shortage of oil.
"There is a security premium and a geopolitical risk premium in the price of oil. Sometimes it goes out of the price of oil and then comes back in. The point is that it can go up and down, but it is not going to go away until there is some kind of resolution," Yergin argued.
However, oil demand growth could slow down if the US credit crisis gets worse.
"The biggest question right now over the oil prices is what is going to happen with the US economy. That is a moving picture," Yergin said.
He said Asia and Europe will not remain unaffected by an economic downturn in the US.
"The question is not a decline in the US demand but slowing of the global economy. That will have a big impact on the oil market," he said.
And it would become clear only in the next two or three months whether it is "just a slowing of the economy or something more severe" in the US.
"People do not know how extensive the US credit crisis is. This is not like the Asian financial crisis of 1998 but that started with the real estate problem too," he said.
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