The soaring cost of oil

While the leaders of the industrial world bicker over energy use and how to control it, the oil market is forcing the pace in the most effective way of all - by raising the price. The remorseless rise this week towards the $60 per barrel mark has given a sharp retort to those who, earlier this year, said the price at $50 was a flash in the pan, the product of temporary circumstances that would soon be reversed by more oil and lower oil use. In fact, neither has happened.

While the leaders of the industrial world bicker over energy use and how to control it, the oil market is forcing the pace in the most effective way of all - by raising the price. The remorseless rise this week towards the $60 per barrel mark has given a sharp retort to those who, earlier this year, said the price at $50 was a flash in the pan, the product of temporary circumstances that would soon be reversed by more oil and lower oil use. In fact, neither has happened.

The world demand for oil, particularly in China and the newer economies, continues to grow exponentially. At the same time, despite a series of declarations of intent by the oil producers of Opec to raise exports to ease the market, it hasn't happened. There are certainly elements in the current situation that are squeezing supply artificially, in particular a shortage of spare refining capacity and the continued constraints on Iraqi oil output. That means that the market for the time being is peculiarly vulnerable to short-term pressures, from hot weather to holiday movement.

But it is the underlying pattern that is so worrying. The simple fact is that oil production is pretty near capacity while demand shows no sign of pulling back. Far from being a temporary blip, the present squeeze could go on for a generation or more unless demand is curbed dramatically or unexpected new supplies are found.

If that is the case - and oil experts as well as economists are increasingly coming to the view that it is - then the world must come to terms with two serious consequences. One is that, in the medium term, energy prices (and with them the price of gas and electricity) will hold back economic growth, with particularly painful implications for the Third World.

The second is that oil prices are likely to continue to rise until they force a response in terms of demand or supply. Over the longer term that may be all for the good. But in the shorter term it could mean a difficult passage. In real terms, energy costs remain fairly low. They may have to reach much higher - as much as $100 on some accounts - before they produce a counteraction in new energy sources and more efficient use.