Hamish McRae: It might be painful at the pumps, but it could force the Yanks to dump their SUVs

The pain is at the pumps - but not only at the pumps. The most visible sign of rising energy prices is the £1 a litre petrol but higher raw material costs - most especially energy - are working their way through into the entire global economy. For us, money spent on filling up the car is money not available to spend filling up the supermarket trolley. For the economy as a whole, this is a steady drag on growth: one that will persist for the foreseeable future.

In the very short term, there may well be an easing of pressure. Were Chinese growth to slow, that would reduce pressure not only on oil (China is the world's second-largest oil user, after the US) but on commodity prices in general. The incipient signs of a slowdown in the US would take further pressure off prices.

But don't expect any easing to last. If the Chinese economy continues to grow at close to 10 per cent, that will mean that each year there will be more relentless demand on commodity markets. And while some easing of the pace of growth in the US seems likely, to take the pressure off would need something much more dramatic - and disagreeable.

Meanwhile, there remain considerable political risks, which mainly affect the oil and gas markets: Russia taking a more aggressive attitude on gas prices or Iran deciding to shade back its oil production for a while just to teach the West that it cannot be kicked around.

So we should neither expect much of an easing of commodity prices, nor hope for it. What will be the likely consequences of this expensive energy world?

Let's take this first from the point of view of the UK. We have seen a doubling of the oil price since the beginning of 2004. Last week saw the price nudge past the post-Katrina high of last autumn (see first graph above). UK inflation has remained under control, at least according to official statistics, but there is a marked difference between actual inflation and so-called core inflation (second and third graphs). Core inflation excludes energy prices and seasonal foods (themselves much affected by energy costs). If it weren't for fuel bills, inflation would be fine. As it is, it is sort of all right but with a nagging concern about the future.

Thanks to its North Sea reserves, the UK is only just a net importer of oil, though it seems inevitable that imports will rise as production declines in the years ahead. So last year, at least rising energy prices did not do particular damage to current accounts: the deficit has climbed a bit but only partly as a result of import costs. But with the exception of Canada, the rest of the developed world imports energy. France is now in current account deficit after being in sizeable surplus, and of course the US current account is enormous (about 7 per cent of GDP) and as such profoundly worrying.

That leads to a wider point. High energy and raw material prices obviously put upward pressure on world inflation. But less obviously they also exacerbate global imbalances. Some countries adapt better than others. China has to pay more for its imports but while it retains its huge cost advantage in manufactured goods, it can offset these pressures by exporting more, mostly to the US.

Japan has adopted a similar policy, paying for more expensive imports by going on an export drive, partly to the US but also to the rest of East Asia.

The US on the other hand is hit by a double whammy. It has to pay more for its imported raw materials and for oil. But it also finds itself importing more goods from China, thus enabling China to keep growing but at the cost of a yet wider current account deficit. China and Japan then, in effect, lend the US the money to finance its deficit by buying US government securities.

And us? Well, we have managed to finance our deficit in part by allowing or encouraging other countries to buy more sterling assets. These include the companies that are being bid for at the moment but they also include official debt. The pound has become a rather attractive currency for central banks to hold in their reserves. It is still a long way behind the dollar and behind the euro, too, in official reserve holdings but it recently passed the yen in popularity. So we are propping up the pound by getting people to lend us money.

What worries me is how this will all end. Britain is not in an especially serious position because the current account deficit is manageable and we are not a large raw material importer. We can scramble by. The US is different. People have been worrying about the so called "twin deficits", the fiscal deficit and the current account one, for so long that fatigue has set in. The dollar has not collapsed as some financial companies have predicted. There has been no sudden outflow of funds to trigger this. The doomsayers have, so far at least, been crying wolf.

However, the people who warned of an excessive share market bubble in the late 1990s were also accused of crying wolf, correctly as it happened, for many years. Most people thought deep down that the boom was unsustainable but being right three years early is no way to keep others listening. More recently, those who have warned of a property bubble, both here and in the US, have also found themselves accused of scare-mongering.

So what will happen?

I think there are two forces here. One is the pressure that high energy and raw material prices put on global imbalances, exacerbating an already difficult situation. The end of this growth phase of the economic cycle will in some way be associated with that. The other is the more general and continuous pressure that resources will put on world growth, irrespective of these imbalances and the position of the economic cycle.

Coping with the first will be, we should all hope, a gradual adjustment rather than a sudden and disruptive one. Coping with the second will be a long slog not just for the existing developed world but for all countries seeking to climb to developed status.

Thus much of the long-term success of China and India will depend on their ability to continue growing in an energy-efficient way - a much more energy efficient way than China, in particular, has managed to achieve so far.

Hectoring is no use. Being more efficient with the use of energy in the UK or indeed in Europe may be a sensible goal (and it is fascinating to see both of the next potential prime ministers agreed on the need to conserve). But what matters is what the US, China and India do.

The good news is that the market is effective in changing people's habits: the evidence from the US is that Americans are downsizing their vehicles when they change them. The bad news is that it will need even higher energy prices to make a real dent in energy consumption. But maybe that is what we will indeed get in the years to come.

The G7 is at the mercy of Saudi... again

The weekend sees the half-yearly G7 finance ministers meeting in Washington, under the auspices of the spring IMF/World Bank meeting. There will be the usual bland communiqué and no surprises are billed. It is understood that it will focus on the dangers of world imbalances (again) and currency developments in Asia - in particular, concerns about the slow pace of revaluation of the Chinese yuan.

There will also be a lot of talk about the policy of the Federal Reserve under its new chairman, Ben Bernanke, in his first such meeting since he took up his post. It follows strong signals from the Fed that the period of policy tightening is drawing to a close.

But the economic team at ING points out that aside from the G7 meeting, next week is a big one for financial markets and this will focus attention on what the finance ministers say. There are other big interest-rate decisions coming up for Europe: is the weak recovery now taking place on the continent going to be strong enough to permit further rises in rates?

On Monday there is something of even greater potential interest: an informal meeting of Opec members to discuss the impact of high oil prices on world growth (see above). Opec does not control the oil price now to the extent it did 20 years ago, but Saudi Arabia remains the swing producer - or at least it claims to be able to increase output. We'll have to see what emerges but the thing to look for is any suggestion that the Saudis might want to increase production. They are known to be concerned about the economic instability created by present price levels, unlike the President of Iran, Mahmoud Ahmadinejad, who said on Friday that the surge in the oil price was "very good". If the Saudis can increase production now would be the time to do so. If not, well, we know that global oil production really is at full tilt and that is a situation that has not occurred before. An interesting week indeed.