KEY POINTS:
It's official, there is an oil crisis. The International Energy Agency (IEA) says so.
"We can call it an 'oil crisis' given the current price, and that it continues to climb even after global efforts to cut consumption," IEA executive director Nobua Tanaka said this week. "We see a critical, structural issue in the global oil market, where supply growth isn't catching up with demand."
That may be cold comfort for motorists as they fill up for $2.12 a litre this weekend. But still, it is nice to know that even the experts don't see the events of the past few weeks as being "business as usual".
There are three major drivers of the big spike in prices. Rapidly growing demand, slowing growth in supply and a market bubble fuelled by speculators who are pouring cash into commodity markets - thanks in part to our old friend the credit crunch which has hobbled traditional financial markets. Rising demand isn't a new phenomenon but it is probably the biggest underlying issue facing oil consumers.
Statistics released yesterday showed that China's oil imports last month were 25 per cent higher than in May a year earlier. And, as Brian Gaynor points out today, it is not just developing nations with a rising appetite for oil - demand is still increasing in the West.
On the supply side the issue is not as simple as it may seem. Oil is not running out - at least not any time soon.
This week Richard Pike - a former industry analyst, now head of the Royal Society of Chemistry - argued that there may be twice as much of it in the ground as previously thought. Current estimates are about 1.2 trillion barrels, double that figure and oil could be the dominate source of fuel through until the 22nd century, Pike said.
But while global supply is still growing it is doing so at an ever slower rate.
There may be lots of oil left but it is likely to be found in hard to reach places - such as the Great South Basin off the south coast of New Zealand or the oil sands of sub-arctic Canada.
The costs and risks involved in getting the stuff from those places to your car are not enticing for investors. And given the soaring price of other commodities such as steel - which is needed in large quantities to build new drilling rigs - there is little sign that supply is about to rise rapidly. The issue that has caught the world by surprise in the past few weeks is market speculation.
Bloomberg noted yesterday that oil has traded up 697 per cent since 2001 - a bigger spike than the dot.com bubble of the late 1990s.
Trading in oil - and wheat, rice and other commodities for that matter - is caught in a kind self-perpetuating spike.
It is a bubble fuelled partly by the fact that traditional equity markets are out of favour after the US credit crunch. Commodities are also seen as a safe hedge against a falling US dollar.
The underlying supply and demand equation makes commodities look like a safe bet. Then because so many investors are throwing money at the market, it accentuates the demand.
So when an analyst predicts where a price might end up - as with last Friday when Morgan Stanley tipped oil to hit US$150 ($200) in July - investors pile in with more cash. Why wait for oil to hit US$150 when you can buy it today at US$135? And so it goes on.
How much speculation should be blamed for the current price remains hotly contested. It is serious enough that US officials are now trying to regulate the oil futures market.
History would suggest that might not be necessary.
Bubbles almost always burst. And that would offer the best hope for a sharp fall in oil prices. There is a growing chorus of experts who believe oil is headed for a fall.
At some point stocks will come back into favour and then it may only take one surprising piece of data - a drop in US demand or a new oil field discovery - to tip the market over.
Here's hoping.
It won't solve the world's oil problems but it would bring some welcome short-term relief.
Liam Dann is the Herald's business editor.
