Adrian Hamilton: This meeting in Saudi Arabia won't solve oil prices

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You have to love politicians for their sheer cheek. For the last 10 years as chancellor, the Prime Minister (and for half of that period the Governor of the Bank of England) have lapped up all the international pressures bringing prices down in Britain and claimed it was the result of their own, wise policies. Now that the international pressures have all gone in the reverse direction, they're declaring that it is all to do with outside forces and nowt to do with them.

Well, what goes around comes around, as they say. For most of the last decade, commodity prices have fallen, manufactured goods from China and Asia have become cheaper while the strength of sterling has reduced import costs even further.

Now we have the opposite, with oil and food leading the charge back up the prices escalator, sterling falling and manufactured imports growing more expensive as inflation hits even the Chinese and Indian economies. And what does Gordon Brown and his Bank governor do? They blame it all on outside events beyond their control.

What is more Brown even suggests it is all the fault of the oil producers artificially restraining supply to keep up prices. Which is why he is off this weekend to Saudi Arabia to attend a meeting of producers and consumers to sort it out in a gentlemanly fashion.

But is the price of oil merely the result of artificial distortions of the market, the product of monopolistic suppliers and greedy speculators, as the Prime Minister and cabinet members are wont to suggest? Or are we seeing something far more fundamental which is going to affect our way of life and the economics of globalisation for the long term?

The first thing to be said is that Brown is right on one thing at least. Inflation is the biggest single cause of international concern at the moment and oil is at the very core of it. The effective doubling of prices within a couple of years is behind the rise in cost of fertilisers that is putting up food prices, the higher charges for transport which is ratcheting up the cost of manufactured goods, as well as the dramatic increase in heating and car costs which affects the ordinary consumer and hence their expectations and wage demands.

We have been here before, of course, during the Seventies when the doubling of prices brought about a prolonged slump in the world economy and an inflation rate that took much of the decade to sort out (it wasn't the only thing but it was crucial). Eventually higher prices brought about their own solution in increased oil production, especially in areas outside the Middle East, and lower demand.

Will the same happen this time round? The question is made more difficult because on this occasion, unlike in 1972, there is no actual shortage. The Saudis are right on that. But then are European leaders right in blaming it on speculators driving the price up in the futures market? Is Brown right in thinking it is due to the activities of the producers? Are the oil companies (not without self-interest) right in blaming it on policy distortions that hold back production investment and keep demand artificially high by subsidising the price in the developing world? Or are the environmentalists correct in attributing it to the end of the oil era as oil output peaks?

The simple answer is that no-one knows or, should you wish to be more complicated, a bit of all these things. Huge sums are being poured into the futures market but they are not purely speculative. With currencies gyrating as well as prices, investors are trying as much to protect themselves for the future as make money out of it. Although there is no absolute shortage of oil, there is a severe tightness in supply, and particular problems of demand for products such as diesel caused by such factors as the Chinese earthquake. It is not only in the paper market that prices are rocketing. They're also doing so for real cargoes of oil for immediate delivery.

Increased supply from Saudi Arabia could ease pressures and change market sentiment. But the trouble is that Saudi Arabia is virtually the only country that can raise output and even it can manage only a small percentage rise. It's promised extra 250,000 barrels per day has been known for ages. The rest of the oil producers, including the North Sea and Russia, are virtually all peaking. The one obvious medium-term saviour would be increased oil from Iraq and gas from Iran and both of those are constrained by Western policies – a subject which presumably Brown will not be bringing up with his hosts this weekend.

Indeed the meeting in Jeddah is little more than a presentation exercise to show Saudi concerns for the consuming world and the developing world in particular where it hopes to gain influence.

If in fact we are now witnessing the beginning of the end of the oil era, the question is at what price will the alternative sources of hydrocarbons and energy be brought in? The market failed to provide that answer in the Seventies. Maybe the traders and the speculators, with their paper deals and gambling ways, will manage it this time.