Oil spikes usually metastasise once energy costs reach 9 per cent of global GDP. The longer they stay there, the greater the damage.

That proved to be the pain barrier in the 1970s and again in 2008, and we are just shy of that level right now.

"Oil is already capturing a higher level of European GDP than in 2008," said Francisco Blanch from Bank of America.

The rule of thumb is that a 10 per cent rise in crude cuts United States' growth by 0.2 per cent four quarters later, but the science is flabbily soft and nobody knows where the inflexion point lies.

The effect is famously "non-linear". Nothing much seems to happen until confidence suddenly snaps.

What is deeply troubling is that Brent crude should have reached fresh records in sterling, £79 (S$157), and euros, €94 (S$155), with a knock-on effect on US petrol prices, mostly tracking Brent - even though the International Monetary Fund has sharply downgraded its world growth forecast to 3.25 per cent this year from 4 per cent in September, and even though the International Energy Agency (IEA) has cut its oil use forecast for this year by 750,000 barrels per day (bpd).

Oil is not supposed to ratchet defiantly upwards in a downturn, which is what we have with the euro zone facing a year of contraction in 2012, and much of the Latin bloc sliding into full depression. Japan's economy shrank in the fourth quarter.



RELENTLESS SUPPLY CRUNCH

Asia's emerging powers - the key force driving the commodity boom of the last decade - are in various stages of "soft-landings" after hitting the monetary brakes last year to check property bubbles and curb inflation. China's manufacturing has been bouncing along near contraction levels through the winter. So what happens when it recovers?

The unpleasant fact we must all face is that the relentless supply crunch - call it "Peak Oil" if you want, or "Plateau Oil" - was briefly disguised during the Great Recession and is already back with a vengeance before the West has fully recovered.

The IEA said non-OPEC production stalled in 2010 and last year. There was no net increase.

While there was a boost from Canada's tar sands, America's shale-oil and Brazil's offshore rigs, this was offset by the relentless erosion of the North Sea fields and Mexico's operations, a collapse in the Sudan as well as Libya's woes.

Meanwhile, OPEC spare capacity has fallen to 2.5 million bpd, compared with 3.7 million this time last year during the Arab Spring, the event that caused a comparable spike in crude prices and arguably triggered the sharp global slowdown a few months later.

The chain of causality is hotly disputed. A young professor Ben Bernanke, no less, wrote the definitive paper in 1997 - Systematic Monetary Policy and the Effects of Oil Price Shocks - arguing that policy-makers themselves are the villains because they over-react.

"The majority of the impact of an oil price shock on the real economy is attributable to the central bank's response to the inflationary pressures engendered by the shock", he wrote, though he forgot the lesson himself in 2008 when US Federal Reserve rhetoric turned hawkish just as the M3 money supply was crashing.

Oil spikes act as a tax and are deflationary. You should "look through" the meaningless jump in headline inflation. Yet the European Central Bank (ECB) rose to the bait in 2008 and again last year, lifting rates into the teeth of the crisis, with sadly predicable results.

"The ECB is likely to be less trigger happy under Mario Draghi," said Bank of America.



MIDDLE EAST TENSIONS

Be that as it may, Saudi Arabia has reportedly cranked up output to 11.5 million bpd.

If so, it may be near its feasible limits. No other country can step in. Which leaves us very naked as brinkmanship with Iran nears its denouement.

The issue is not whether Iran has the military kit to close the Straits of Hormuz and cut off 18 per cent of global oil shipments for more than a few days (probably not), but whether an Israeli/US attack on the regime's nuclear facilities would later set off an uncontrollable chain of events in the Middle East.

There is clearly danger of a spill-over into Bahrain and the eastern province of Saudi Arabia, home to the kingdom's aggrieved Shia and most of its oil. Even so, the Iran risk premium in global crude prices is only US$10 (S$12.60) to US$15. We must still face the overwhelming fact that global energy supply is on a knife-edge regardless of events in the Gulf - with no relief in sight.

The IEA warned in its annual report that energy demand will rise 40 per cent by 2035. The world must invest US$1.5 trillion just to avoid a lethal crunch.

Even then prices are likely to rise "viciously" unless nuclear power and the renewable family of hydro, wind and solar can come to the rescue.

Fukushima has killed nuclear expansion in Japan, Germany, and beyond. The green drive has faltered.

Yes, the shale-gas revolution has revived America's fortunes. The US may overtake Russia to become the biggest producer of hydrocarbon fuels in the world within eight years, according to PFC Energy.

But that is chiefly a North American story for now. Exploration in Poland, Hungary and Sweden has yielded less than hoped.

While China claims the world's largest shale-gas reserves, development has barely begun and China may lack the water needed for hydraulic fracturing.



COMPETING TOE-TO-TOE

So we have a remarkable situation. China alone will be adding 125 million cars to its roads over the next five years, with auto production targets of 30 million annually by 2016. India is spending US$1 trillion on infrastructure projects over the next five years.

Variants of this are happening across Asia and Latin America. Two billion people in the emerging world are joining the global economy and competing toe-to-toe for scarce resources with the West. Their rising demand - not the West's declining demand - will set oil prices.

"Between 2008 and 2011, we saw a decrease in demand from mature economies of two million bpd, while China increased by two million bpd in the same period," noted Mr Mohammed Al Sabban from the Saudi Petroleum Ministry.

The West has the disquieting experience of watching crude soar even as it languishes in stagnation. This never used to happen. If the West faltered, energy costs would fall too, acting as a stabiliser. This harsh new reality is going to become uncomfortable when the emerging world enters a new cycle of growth, leaving Western countries behind. 

The West should not be defeatist. Engineers and scientists are forever at work. A quantum-leap is possible in solar technology. The Chinese may crack cheap and safe nuclear power from thorium, abdicated by the British, but the West should not be complacent either. Windmills anybody? 



Ambrose Evans-Pritchard is International Business Editor of The Daily Telegraph. 

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