Oil is back in the headlines. The price of crude oil is hovering around record levels and the impact is already being reflected at Irish petrol pumps. If high crude prices are sustained for a prolonged period, the impact will feed through to the general inflation rate.
Analysts calculate that even at current levels oil prices could add 0.5 of a percentage point to the likely average inflation rate this year, bringing it close to 2.5 per cent. Economic growth prospects would also be hit.
Political and economic factors have combined to send oil prices higher. The problems in Iraq and the wider political uncertainty in the Middle East are worrying the markets. While the world is less reliant on oil than it was during the crises of the 1970s, the Middle East is still of key strategic importance in the energy market. Two-thirds of the world's oil reserves are in Saudi Arabia and four of its neighbours, including Iraq.
The current price rise has been exacerbated by the balance of supply and demand in the market. Demand has picked up as the world economy has recovered and the rapid growth in China has also had an impact. Meanwhile reserves held by oil companies are at a low level. Opinion is divided on whether the recent rise in prices is overdone; many analysts believe that prices will gradually fall back in the months ahead, but a substantial minority is fearful that prices will hold at current levels, possibly going higher if the situation in Iraq deteriorates.
The rise in oil prices has both short and long term implications for Government policy. Over the coming months, Ministers are due to complete plans to impose a carbon tax next year. This would push up the cost of a range of fuel products, with the heaviest tax on the biggest polluters. However if higher oil costs are already fuelling inflation, the Government needs to be careful not to make a bad situation worse.
Carbon tax is designed as a means of reducing greenhouse gases to allow Ireland meet its commitment under the Kyoto Protocol. It is intended as part of an overall energy strategy to move our reliance away from the most polluting fuels and spur the development - and use - of renewable sources.
The current price rise has again highlighted how slow Ireland has been in developing alternative sources of energy. The use of coal to produce electricity has reduced and gas use has increased. Unfortunately gas prices tend to rise in tandem with oil, so we could be facing a significant increase in the cost of both of our main fuels. The lessons of this experience for the future must be drawn and then acted on.