An excellent analysis of how we got to $100 oil on the website of Cambridge Energy Research Associates raises the question of how much higher prices can go, but does not answer it.

The piece appears to suggest that the "break point" for oil prices, as illustrated in figure 6 with some cute little blue figures, is about $120. At that point, factors such as the rise of energy efficiency, alternative fuels and other policy changes, as well as the economic impact, really begin to take their toll on demand.

As CERA points out, however, the average price for WTI over 2007 was a "mere" $72 a barrel; $100-plus sustained for a year or more would do much more damage to the world economy than anything we have seen so far. The break point may well turn out to be pretty close to where we are now.

Opec’s efforts to defend $100 notwithstanding, I think a slowing world economy still means we are likely to see oil lower at the end of 2008 than at the beginning.

US crude has touched $100 a barrel at last - well, just about, anyway - meaning that I have scored the first success in the FT’s predictions for 2008.

It was, of course, a very easy call to make: it was impossible to believe that there would not be some event sufficient to push a volatile oil price up the few extra dollars that it needed. As it has turned out, the assassination of Benazir Bhutto, fresh attacks in Nigeria and a weak Institute for Supply Management survey of US manufacturing have done the trick.

Behind those immediate factors, the underlying factors behind the strong oil price are well-rehearsed. Opec agreed cuts in its production in 2006 and those cuts held for much of last year, helped by the fact that some members such as Iran and Venezuela would have found it hard to increase production even if they had been allowed to. Non-Opec production has been deeply disappointing, partly as a hangover from the years of under-investment at the beginning of the decade, partly because mature areas such as the North Sea have been declining faster than expected, and partly because some oil-rich countries such as Russia have become  less hospitable to foreign investment. At the same time, demand for oil in emerging economies, particularly China and the oil producers themselves, has grown strongly.

Yet while that combination of forces sent oil from $60 a year ago to $100 today, it is hard to see it being sustained, at a time when the outlook for the world economy, and in particular the US, is so troubling. China attracts the attention in terms of the oil market, because it is the biggest source of demand growth, but the consumption of China and India together is less than half that of North America. An important question for the oil market as the year wears on will be how far China can avoid the turbulence created by the economic problems of the US. Recession in the world’s biggest oil consumer plus a slowdown in the world’s strongest-growing oil market do not sound like a prescription for high oil prices.

The only way you can realistically remain an oil bull and an economic bear - which is what the markets seem to be right now - is if you take a very negative view of the supply outlook, and the evidence to support such a view remains unconvincing. Today’s Lex column takes a timely pop at peak oil theorists, pointing out that while Marion Hubbert was right about the US, he was way off on his predictions of world output. The latest warnings about Opec’s long-run supply potential, published in Opec’s own review, are sobering, and suggest a future of tighter supplies and higher prices. But in the near term, it looks likely that demand for oil will take a hit - partly, of course, as a consequence of the high price - while supply is rising, and in the months to come we will see a retreat from $100.

With US crude now over $93 and heading for $100, economists have been scrambling for their models of how oil shocks affect the economy.

James D. Hamilton’s Econbrowser has a characteristically excellent round-up of the arguments, picked up by Brad DeLong. He cites a good article by Jerry Taylor and Peter VanDoren of the Cato Institute, arguing that

"the inflation, unemployment, and recession that supposedly follow oil price shocks are nowhere on the macroeconomic radar screen. If the economy goes into a tailspin, it will be in response to bad news in the housing market, not the oil market."

Similar arguments are made by Greg Mankiw at Harvard, a former chairman of George W. Bush’s Council of Economic Advisers, and Mark Perry, a professor at the University of Michigan. Both use a chart showing that the energy intensity of the US economy, as measured by British Thermal Units per dollar of GDP, is today less than half what it was in 1950, suggesting that the economy’s vulnerability to high oil prices has also dwindled.

Probably the last word on all this, though, came from the IMF back in April’s World Economic Outlook (chapter 1), which drew a contrast between a supply shock (bad for growth) and a demand shock (which could be good for growth). What we are going through now looks like a textbook example of that growth-friendly demand shock.

Prof Hamilton sounds a warning, though. As he points out, the share of spending on oil in US GDP fell from the early 1980s to the early 2000s in part because the price of oil was falling. As the price has risen, the inelasticity of demand has meant that oil’s share of total spending has been rising, and that could make the US and other oil-consuming countries more vulnerable to a price shock. He writes:

"We can avoid a recession only as long as consumers and firms remain as confident as Taylor and VanDoren above, and everything outside of housing continues to do well. Should we count on that as oil surges to $90 and beyond?  I am not so sure."

If global growth does hold up, one consequence would be that the demand for oil would stay strong. This year, the picture has broadly been of little change in oil demand in the OECD countries - with a small rise in the US cancelling out a small fall in Europe - but reasonably healthy growth in China and the oil-producing countries. For next year, both the IEA and Opec expect something similar. (Opec figures in the Monthly Oil Market Report, available as a PDF.)

That means we could see the price of oil being driven yet higher, and there must be some level at which the price will at last begin to bite on global growth. We can only hope we don’t get there.

As oil surged towards $80 a barrel last year, people worried about whether the world economy could cope. The oil shock, along with the US housing crash, was among the reasons cited by Nouriel Roubini of New York University here on his blog (some content requires subscription) and in a piece for the FT, arguing that a US recession was coming.

Now Lutz Kilian of the University of Michigan has shed interesting light on the debate. He argues in a recent paper that not all oil shocks are alike. Oil price surges are more often a result of demand-side factors, such as a strong world economy or precautionary stock-building, than of supply-side disruption. In particular, the run-up in prices this decade has been largely caused by strong global growth.

As James D.Hamilton of the University of California at San Diego, observes on his blog, one implication is that the real threat posed by the latest oil price surge has not been a recession, but higher inflation.

The US housing crash, however, may be another story….