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.

The most bizarre event so far of the third Opec summit in Riyadh, which properly gets under way today, was the accidental broadcast yesterday of about half an hour of the proceedings of the private meeting of energy, foreign and finance ministers, discussing the idea of including a mention of the weak dollar in the summit’s final declaration. The footage was shown on the widescreen TV in the press room, and it is rumoured, right through the TV system in the Intercontinental Hotel, where the meeting was being held, until Saudi officials worked out what was going on - possibly alerted by wire service reports - and rushed to pull the plug.

The most sensitive comments were made by Saud al-Faisal, the Saudi foreign minister, who warned of the danger of a dollar "collapse" if the final statement mentioned the dollar. "Just indicating that we have charged finance ministers with studying this issue … would mean a decision taken by Opec would have the opposite effect and the media would pick up on this point," he said, in Reuters’ translation. "And then perhaps we would find that the dollar had collapsed, instead of us having done something in the interest of our countries."

His point was that any signs the group is further cooling on the dollar as the currency in which oil is priced - and more importantly, in which oil wealth is held - would alarm currency markets and trigger further dollar sales.

It is an embarrassing point to be caught making in public, in part because it carries a suggestion of Saudi politicians defending US interests. But in fact, defending the dollar’s value is an important policy objective for Saudi Arabia for purely selfish reasons. As Adam Robinson and Edward Morse of Lehman Brothers pointed out in a great piece in the FT last month, the weak dollar is already undermining the value of Saudi Arabia’s $800bn in dollar reserves. The Kingdom certainly does not want to weaken it any further.

The IEA could not have stage-managed a more dramatic backdrop for the launch of its 2007 World Energy Outlook. $100 oil says more about Chinese demand than a thousand forecast charts ever could. When the IEA’s Fatih Birol warns that "the wheels could come off" the world’s oil supplies, you have to believe him.

There are many good points well made in the IEA’s analysis. But there is something of a contradiction in its position: it wants oil producers, including Opec, to invest in capacity to produce more oil, while trying to persuade the world to use less of it. It is no wonder Opec is suspicious.

As Mr Birol says, however, the threat of oil shortages is fundamentally less of an issue than climate change. The world can eventually adjust to oil running out. Our chances of adjusting to a world that is six degrees C hotter do not look so good. And that, unfortunately, is about the size of the temperature increase implied by climate models given the IEA’s projections of what will happen under "business as usual" scenarios, with China doubling its coal-fired power generation capacity between now and 2030.

We should probably be grateful if the world never does get beyond 100m barrels a day of oil production, as Total’s Christophe de Margerie thinks it won’t. That would at least help keep climate change within manageable bounds. The IEA’s "alternative scenario", including more energy efficiency and renewables, needs a mere 100m barrels of oil a day in 2030, and keeps the temperature increase down to a - just about - bearable 3 degrees C. Unless we make up the shortfall from coal to liquids, of course.

There was a flurry of excitement in the oil market this afternoon when it appeared that France had decided to release oil from its strategic reserve. The truth was less dramatic: the government was actually releasing 285,000 tonnes  - about 2m barrels - of diesel and heating oil to offset problems at two refineries, and the oil was not coming from its strategic petroleum reserve.

All the same, the story raised the question of whether, given all the talk about whether today’s oil price is a speculative bubble, US and other governments should release enough oil from their reserves to give the speculators a bloody nose. If they succeed, they can replenish their stockpiles at much lower prices.

The history of currency interventions suggests they are most successful when markets have got far out of line with fundamentals, and intervention acts as a slap in the face to bring the market back to reality. Daniel Yergin of Cambridge Energy Research Associates argues that oil prices are becoming "decoupled from the fundamentals of supply and demand." If he is right, then an intervention in the oil market just might work.

It would, admittedly, be a gamble. When all the commercial players seem to want to be long of oil, it would be a brave energy minister who decided to go short. Much better to get Opec to do the job for them. 

After holding out for a year and a half, the Chinese government has at last bowed to the pressure of the crude oil market and raised the regulated prices of petrol, diesel and jet fuel by almost 10 per cent. Beijing is worried about inflation and the discontent caused by the rising cost of living. But the combination of soaring crude prices with regulated product prices meant the refiners were losing more than ten dollars on every barrel they processed. Sinopec, China’s biggest refiner, is said to break even at a crude price of $60 a barrel; $94 must have been killing it. Many small refiners shut down altogether, and the result was fuel shortages, with reports of long queues at petrol stations and rationing  spreading from the coast across the country to the  outskirts of Beijing. Ultimately the government seems to have decided that more expensive fuel is better than no fuel at all. Taiwan faces a similar dilemma.

The effect on the world’s oil market will in the short term be to increase demand. Those refiners that were offline will probably come back up to get a piece of the pent-up demand, and they will need more crude. In the longer term, though, rising prices may take some of the edge off the Chinese market, which is currently the single biggest contributor to the growth in demand for oil. Regulated product prices are a big reason why Chinese demand has been so robust as the price of crude has soared.

If, as Econbrowser argues, the rise in the price of oil is all about the balance of supply and demand, China’s move is one step towards reining in that demand.

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.

The prospect of a Turkish attack on Iraq, which has contributed to the rise in oil above $90, has revived the debate over whether the US-led invasion of 2003 was a "war for oil".

Alan Greenspan’s remark in his memoirs that "the Iraq War is largely about oil" was seized on by some commentators. But the conspiracy theorising was overdone: he was hardly revealing the secret masterplan behind the invasion. Mr Greenspan was far from the heart of policy-making, although he did apparently make his views known. It looks more as though he is simply trying to make sense of a strategy that otherwise defies rational explanation. As Thomas Powers put it in the the New York Review of Books last month: "Not knowing why we went in allowed us to go in".

In the London Review of Books, Jim Holt attempts to make the argument that "It’s the oil", but his charges do not really stick. "The draft law that the US has written for the Iraqi congress would cede nearly all the oil to Western companies," he writes, which is true if you believe that those same companies control all the oil in Russia or Venezuela. The draft oil law allows for a range of different investment structures, and ultimate control over the resources always lies with the government. If Iraq needs foreign investment, which it desperately does, then it has to offer investors sufficiently attractive commercial terms.

It is not as if western companies have been rushing to take advantage of the invasion supposedly conducted for their benefit. Decisions on investing in Iraq are very difficult, and while much of the country is in flames, and the country’s politicians are so bitterly divided, none of the oil majors will be prepared to make significant commitments. Iraq’s oil production has hardly vindicated a decision to go to war for oil, either: it is running at about 2m barrels per day, down from 2.5m just before the invasion. Rupert Murdoch’s pre-war assertion that "the greatest thing to come out of this for the world economy, if you could put it that way, would be $20 a barrel for oil" looks more deluded than ever.

Mr Holt writes "In terms of realpolitik, the invasion of Iraq is not a fiasco; it is a resounding success." If only that were true.

US crude has gone roaring ahead to within a few cents of $88, as speculators get the bit between their teeth. You can watch Javier Blas talking about where oil goes next here.

The latest trigger has been identified as the threat of Turkish military action against Iraqi Kurdistan, which could disrupt Iraq’s oil exports through the northern pipeline from the Kirkuk field. But the flows through that pipeline are very small, averaging only about 100,000 b/d this year because of regular attacks, although they have been building up recently, leading - ironically - to talks about a more regular supply contract with Turkey.

The underlying reason for the price surge is that oil inventories are dropping, and look likely to be tight over the winter, as the International Energy Agency pointed out last week. Today’s soaring prices look like conclusive proof that the 500,000 barrel a day output increase agreed by Opec in September, which takes effect in two weeks’ time, definitely was too little, too late.

The next Opec meeting, the summit in Riyadh on November 17-18, looks a long, long, way away.

UPDATE: Oil has powered through $88, meaning that it has put on about $4 in two days. Opec has issued a statement saying it "does not favour oil prices at this level", but blaming everyone else for the surge in prices.

It says: "The rising oil prices which we are currently witnessing are, however, largely being driven by market speculators. Persistent refinery bottlenecks and seasonal maintenance work, ongoing geopolitical problems in the Middle East and fluctuations in the US dollar, also continue to play a role in pushing oil prices higher. Additional political tensions, seen during recent days, are also pressurizing oil prices upwards."

With that lot ranged against it, it is hardly surprising that Opec has lost control of the market.

Meanwhile, Goldman Sachs must be feeling pretty smug.

With oil prices trading above $80 a barrel, Wall Street banks have raised their price forecast for the rest of 2007 and 2008. In some cases, the prices updates released this week, as the oil prices hit a fresh all-time high of $82.51 a barrel, are significantly large.

Unclear is for now what would be the economic impact of oil prices above $80 a barrel.

Goldman Sachs led the bulls with a price target for West Texas Intermediate for the end of 2007 of $85 a barrel, up from an earlier forecast of $72 a barrel. The bank also introduced a price target of $85 a barrel for 2008, with a year end forecast of $95 a barrel.

Jeffrey Currie, head of commodities research at Goldman Sachs in London, said that despite only modest demand growth this past year, anemic oil supply growth has pushed the market into a significant deficit. This has created “the first cyclical bull market since 2003 that will likely carry into 2008,” Mr Currie added.

Barclays Capital has raised its price forecast for 2007 to $68.8 a barrel from $66.3 a barrel. The bank, which has been one of the most accurate oil price forecaster in recent years, also raised its 2008 price forecast from an earlier $73.9 a barrel to $77.0 a barrel.

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