In just three months, crude oil prices have risen from $87 to almost $140. Forecasters now predict a $200 range for prices before the end of this year.
At first glance there is no reason why this should not happen. If there are people prepared to sell and buy oil at that price, the market would simply applaud, albeit in silent trepidation.
The problem is that forecasters also warn against a looming recession. Some even claim that the global economy is already in recession.
In economics, as in the science of gravity, what goes up comes down. So, oil prices cannot continue rising forever.
The golden question now is when will they start to fall? It might appear reckless to provide an answer right now. Nevertheless, I think prices will start to weaken soon. That $200 mark may yet have to wait for some other time. Not now.
The reason is that, contrary to popular perceptions, demand for oil is elastic. This means that, when prices rise beyond the level of market tolerance, people can and do reduce consumption.
We have seen this even in the case of addictive products such as cigarettes. People cut down on smoking as prices rise. The average European, for example, spends a smaller fraction of his income on tobacco than a generation ago.
But, what about oil? With all focus on the so-called "oil thirst" in China and India, new economies in need of cheap energy, we might have lost sight of trends elsewhere.
In the United States, for example, oil consumption in 2007 was slightly lower than in 2004. This is a remarkable change, indicating the start of a slow but steady progress away from fossil fuels. The latest statistics also indicate a slowing down in demand in China, now the world's biggest consumer of oil, ahead of the US.
Although more than two-thirds of oil consumption is on transport, we must not forget that, directly or indirectly, more than 80 per cent of that transport is related to agricultural and industrial production.
In other words, people who drive cars do not do so simply for fun. Thus, if economic activity slows down, oil consumption will also decline. That means you cannot have a recession and oil prices at $200 a barrel.
The reason oil prices have been rising, is that all forecasts about an imminent recession have been proved wrong. The US economy is till growing by about three per cent per annum.
Japan, the world's second largest economy, has just revised its forecasts upwards to report a four per cent growth rate. Even the lethargic European Union is still doing well, with average growth rates of just under three per cent.
The current situation is interesting because oil prices provide a better reflection of the state of the global economy than most forecasts.
The rises we have witnessed in the past two years were prompted by the correct calculation that, despite various financial crises, the global economy would continue to grow.
However, here comes a point when it is no longer the overall growth that sets the tune but levels of industrial production that is more directly dependent on oil.
Seen from that angle, oil prices should soon be heading for a decline. The reason is that, while the overall economy is growing, industrial output in most major economies is showing signs of stagnation.
The US is still showing a tiny rate of growth, around .02 per cent. Elsewhere, there is actual decline: in Japan by two-thirds of one per cent and in the European Union by an average of five per cent. (In Spain the fall in industrial output is almost 14 per cent!) Even China and India are experiencing an actual fall in industrial production.
Flat rate
This means that for oil prices to fall you don't need a recession in the US, Japan and Europe. All you need is a flat rate of industrial production.
Since the end of the Second World War, the global economy has experienced 10 recessions, that is to say a situation in which the major economies experience at least two consecutive semesters of decline in their gross domestic product.
All but one of those recessions started with relatively sharp rises in energy prices, especially crude oil. All ended with dramatic falls in oil prices. In the 1980s recession, oil prices fell by almost 70 per cent.
As already noted, forecasting is a risky business. But all the evidenced available now shows that the $200 price per barrel of oil is more of a fantasy than a serious projection.
In fact, it maybe more realistic to see oil prices plummet to a third of what they are today in the next two or three years.
The worst situation we may find ourselves in is that of yoyo prices. Uncertainty about prices will harm both producers and consumers.
The producers will never know what levels of investments are required to keep up with actual demand. The consumers will never know what portion of their costs of production need be allocated to energy.
The biggest harm done by yoyo prices concerns the members of the Organisation of Petroleum Exporting Countries (Opec) whose economies depend almost entirely on producing and selling crude.
Very high prices remove the urgency for investment in creating alternative sources of revenue and discourage the reform of public services and the removal of subsidies, perks and other features of a rentier economy.
Very low prices, on the other hand, make investment in developing alternative sources of revenue difficult if not actually impossible.
So, is there an ideal oil price? Depending on the circumstances the answer is: yes.
The ideal price is not one that the consumer can afford but one that is not too high to provoke a decline in global industrial production. By that standard we had the ideal price last year, at something around $100 per barrel.
Amir Taheri is an Iranian writer based in Europe.
