How long until oil is $40 a barrel?

Perhaps a $40 target for the oil price this year is not such a bold claim to make. Brent crude is trading above $33 and US light crude is a few dollars more, so the headline figure is not far away.

Indeed, if this was not a US Presidential Election year then more alarm bells would now be sounding. All the focus is on the - still low - consumer price inflation figure, and surging commodity prices and house prices are somehow dismissed as non-inflationary.

Complete nonsense, of course! And failure to check inflation at its prime cause will mean more pain later; that is to say higher US interest rates and a falling stock market, but after the US Presidential Election.

How long ago was it that Opec agreed that $22-25 was the ideal price band to keep producer nations in funds and consumer nations from going broke? We are well outside that price band, and there will be no gain without pain. So a US recession in 2005 is almost guaranteed.

Why can we be so sure? Just look at the fundamentals driving the oil price. Arab nations in Opec abhor the US occupation of Iraq and are hardly rushing to help keep prices down; many feel the US needs to be taught a lesson and that a high oil price is part of the cost of occupation.

Market forces and speculation are also adding their support to higher oil prices. US commercial oil stocks are perilously low as the summer approaches, and air-conditioning in the southern US is switched on. The reason? Oil prices have been too high for re-stocking, so stocks have run low!

There has also been a rush by speculators into oil funds which have been making a boodle of cash out of rising oil prices.

Even more fundamental is a hike in demand from China and India - the two new great oil consumers of the 21st century. China will account for most of the growth in oil demand in 2004, according to the latest forecasts from the International Energy Agency, with oil demand up by 13% to 6.2m bpd.

Given this market situation all it takes is a serious geo-political incident or an interruption to the oil supply in one of the producer nations - and candidates for disruption include Iraq, obviously, Nigeria and Venezuela - and we will see oil at $40 per barrel.

The question then will be: how long will the $40 oil price last? Until a recession brings demand down, is probably the answer.