Return from the long vacation and $70-a-barrel oil

Over the past four or now almost five years the oil price has been rising inexorably higher and higher. With it has come a great oil boom for business in the Middle East.

Visitors to Europe this summer will now be counting the cost of petrol on their credit card statements, and getting an unpleasant reminder about the realities of oil prices for Western consumers. Indeed, economic growth across the continent and UK has slowed to a snail's pace this year, largely due to the high price of oil.

How much longer can this go on? Will we soon see the classic oil price spike - perhaps beyond $100-a-barrel - followed by a collapse in prices to levels more consistent with the economic health of the industrialized world?

Certainly reading the UK newspapers over the summer this is what most economic forecasters have built into their projections. They almost all assume that oil prices are going to somehow miraculously tail-off next year.

The problem is that nobody has a good reason for reaching such a conclusion. Refinery capacity remains the key difficulty, and a shortage of supply of refined products like petroleum will keep prices high, unless there is some kind of a serious economic recession.

It is possible to trace a scenario of an oil price spike leading to a crash in global financial markets this autumn and asset price deflation combined with consumer price inflation and some further US dollar devaluation. In this case, the $70-a-barrel oil price seen this week ought to be sending bigger warning signals to the capital markets.

But capital markets have become rich and complacent on the back of cheap money. It could be that all this is about to change.

The impact on the Gulf economies would be immediate. High oil prices underpin the economic boom that after almost five years is looking a bit stretched with money now going into less and less attractive investments. If the oil price took a tumble after a hiatus in industrialized capital markets then many Gulf businesses would have to review their plans and cut back on expansion.

This is perhaps a sobering thought for those executives returning from a summer basking in the glories of a fruitful 2005 so far.

But the good times never last forever and a little conservatism in periods of economic boom has served many a company well in the past. There will inevitably be casualties among the over-stretched on the way down when it comes.