WHEN ENERGY markets reopen next week, there will be more than a little nervousness that when it comes to oil prices, the only way is up. Oil reached an all-time high of $135 per barrel this week; a year ago it was trading at $65 a barrel. And the effects are beginning to be felt: French fishermen are blockading ports; haulage companies throughout the EU are petitioning governments for relief; and, across the Atlantic, the world's largest airline - American Airlines - has announced plans to cut routes, retire 75 aircraft and sack staff.
The consequences of the oil price spiral cannot be overstated. Industry is hugely reliant on energy and this massive cost increase has come through at a time when many western economies are experiencing a slowdown; indeed the US economy is close to recession. Consumers, already suffering from substantial increases in the price of basic food items, now find themselves paying far more for petrol, diesel and heating oil. Airlines have increased prices and the cost of public transport is certain to rise.
Some of the reasons for the higher cost of oil are well known. The exceptional increase in demand from emerging markets has been a factor. At the same time, developed economies have failed to reduce their oil dependency. Most of them - the US in particular - are demanding even greater levels of supply.
This increase in demand would not necessarily manifest a jump in price if production of oil could rise in proportion. Instead, however, production is hardly increasing at all. The Opec nations, which supply 40 per cent of the world's requirements, see no need to pump out greater quantities; at current prices they are making more money than they know what to do with - and for Saudi princes that is really saying something. But it is also a fact that there has been little investment in new oil field extraction, especially in Saudi Arabia, and the markets are concerned that this might be because there are no new fields to exploit.
The non-Opec nations, of which Russia is by far the biggest producer, are either unwilling or incapable of increasing production. Russian production is said to have peaked this year, just as North Sea oil did a decade ago. The International Energy Agency, an independent forecasting body, is concerned that ageing oil fields and lack of investment will diminish supply growth and points out - worryingly - that while the oil price may be high now, the price of oil futures is even higher.
However, while the imbalance of supply and demand is a contributory factor to the price climb, so too is speculation by institutions and private investors. The increase in oil futures bought for speculative purposes is now almost equal to the rise in oil usage by China. The market is clearly being manipulated.
The near certainty that the price of oil will remain high for the foreseeable future (forecasts suggest it will reach $200 a barrel by the end of 2009) underlines the necessity of sourcing alternative forms of energy and of intensifying steps towards energy efficiency and conservation.