©AFP

At the BP station on Broadway and 15th in Louisville, Kentucky, petrol costs $3.999 cents per gallon. It is a finely tuned, if familiar, exercise in the psychology of pricing – but one that is not convincing anyone. “It’s outrageous,” says Kyle Martin, spending $100 to fill up his battered minivan. “The oil companies are gouging the dirt out of us,” adds Keith Rardin.

Everyone has a story of how they are cutting back elsewhere to pay for the fuel they need to get to work. “I blame the government, for leaving the taxes on gas,” says Mr Martin. But there is also support for Barack Obama. “Once you understand the global situation,” says Charles Smith, “you know there’s little sense in blaming the president.”

The pump is the tip of the spear for the oil market – the place where the pain makes itself felt in consuming countries. At about $125 per barrel for benchmark Brent crude, up 15 per cent this year and close to its highest level since 2008, the oil price is rapidly becoming the dominant concern of governments and business leaders.

It is a reminder that – for all the investment in renewable energy and excitement about shale gas – the world still runs on oil, as it did in the 1970s when supply cuts and price rises caused turmoil in western economies. Hitting real incomes in oil-importing countries, higher prices threaten to chip away at an already fragile global economy. They could also sway the outcome of the US election.

“Oil is not really alarming at these levels,” says Madhur Jha, a London-based economist at HSBC. “What would be alarming is either if we have a big spike in the price, or it continues to grind higher. I don’t think the world economy is healthy enough to deal with that.”

Fatih Birol of the government-backed International Energy Agency, says oil prices could “tip the global economy back into recession”.

The immediate reason for the price rise is the US attempt to exert pressure on Tehran over its nuclear programme by compelling other countries to curb imports of Iranian oil. In November, Iran was exporting about 2.6m barrels a day, roughly 3 per cent of global consumption. By the middle of this year, sanctions are expected to cut its exports by up to 1m b/d.

The fundamental problem exposed by this strategy is that the oil industry was already straining to meet demand, and there is very little slack in the system.

Both producing and consuming, countries have been trying to ease the pain of rising prices. Saudi Arabia, the leading exporter and holder of most of the capacity that could add extra supply to the market, shares with the US and Europe a strong interest in preventing Iran from acquiring nuclear weapons. It has been trying to draw the heat out of the oil price while avoiding a public confrontation with Tehran.

On Monday, the Saudi cabinet, chaired by King Abdullah himself, issued a statement noting the risk from high oil prices to global economic growth and saying the kingdom would work individually and with others if necessary to “return oil prices [to] fair levels”. But trying to reinforce the message the next day Ali Naimi, Saudi oil minister, delivered rehashed arguments heard during the 2008 price spike – including the assertion that so far its customers did not want or need any more oil.

Saudi Arabia says it has the capacity to raise production by 2.5m b/d if markets need it. The problem, says Ed Morse, head of commodities research at Citigroup, is that “the market is seeking transparency, and all the Saudis are giving is verbal assurances”.

The kingdom is already pumping at a three-decade peak of 10m b/d, and increased exports last month by 150-300,000 b/d, according to the IEA. It has filled its strategic storage tanks, apparently in anticipation of a surge in demand for its oil this year.

Saudi Aramco, the state oil company, has been operating its highest number of drilling rigs in four years. It has revived the kingdom’s oldest field, Dammam, which was mothballed 30 years ago, according to the IEA. However, it remains unclear how much oil Saudi Arabia is putting in storage, how much extra production it could bring on and how quickly.

Consuming countries, too, have been struggling to respond. In Britain George Osborne, the chancellor of the exchequer, came under fire from motorists and hauliers after he declined in this week’s Budget to rescind a planned increase in fuel duty. He also introduced tax reforms intended to encourage oil production in British waters. But, with the North Sea now in steep decline as old fields are depleted, that is unlikely to make much difference to world supply.

In the US, Mr Obama has this week been on a two-day “energy tour”, visiting sites for the production of both fossil fuels and renewable power. Under pressure over fuel prices, and criticised for decisions such as the six-month moratorium on deepwater drilling in the Gulf of Mexico after the BP spill in 2010, he has been highlighting the fact that US output is at its highest for eight years, and import volumes have fallen to below half of consumption for the first time in more than a decade.

However, that is primarily the result of a surge in production of oil from shale rock, made possible by advances in the techniques of hydraulic fracturing and horizontal drilling, and has little to do with any government policy.

The Republicans have been emphasising fuel prices in attacks on Mr Obama in the run-up to November’s presidential election, as signs of modest recovery in the labour market make it harder to fight on the issue of jobs. Yet while Americans are worried and angry about fuel costs, it is the overall performance of the economy, rather than petrol prices alone, that appears to influence elections.

Most economists think the rising prices seen this year, while strengthening the current against which the global economy is swimming, will not be enough to wash it downstream. For net oil-importing countries, they reduce real incomes and hence growth. But economists at Goldman Sachs calculate that a 10 per cent rise in crude oil and petrol prices tends to reduce US economic growth by a quarter to half a percentage point. With a consensus forecast for US growth of 2-2.5 per cent for 2012, the impact of the rises so far this year would not be negligible, but nor would it be dramatic.

. . .

More concerning would be evidence that a price rise is reflecting, or encouraging, a general inflationary boom of the kind seen in the 1970s, but supporting evidence is missing. Despite recent increases in expectations of higher prices, core measures of inflation in most of the leading economies remain low, and prices of other commodities – metals, food and agricultural raw materials – remain lower than a year ago.

A severe supply disruption in the Gulf would be a different matter. Oil prices seem to have a “non-linear” impact on growth – larger rises inflict more than proportionate damage – possibly because they are often accompanied by increased uncertainty arising from geopolitical tension. IHS Global Insight, a consultancy, has modelled a temporary closure of the Strait of Hormuz between Iran and the Arabian peninsula, the export route for a fifth of the world’s oil.

In those conditions, IHS believes, the eurozone would be among the hardest hit because of its dependence on imported oil and its already fragile economic state. The disruption could reduce eurozone GDP by nearly 1.5 per cent, compared with only 0.9 per cent for the US. Japan and China would take about the same hits on GDP as the US, with smaller reductions in growth for India and Brazil, and a boost to the output of Russia, a huge net energy exporter.

Trevor Houser of Rhodium Group, a consultancy, says that for America there are uncomfortable echoes of the early 1980s. “Just as the economy was getting back on its legs, the Iran-Iraq war sent oil prices up another 23 per cent. The US economy dipped back into recession in July 1981, and didn’t recover until a year and a half later. The west faces similar risks today.”

There is still more that consuming countries can do, such as releasing oil from their strategic reserves – a move being considered by Mr Obama and other western leaders. A release is likely even if the oil market remains as it is, and certain if it deteriorates.

But while that can put a brake on the market, sending rising prices into reverse is more difficult. The co-ordinated release from reserves by 28 countries aftersupplies from Libya were disrupted by the civil war last year probably forestalled a much steeper rise in prices, but oil was more expensive when that release ended than when it began.

Oil consuming countries may have to accept that if they are to meet their objectives of trying to prevent a nuclear-armed Iran, there will be an economic price to be paid.

Michael Levi of the Council on Foreign Relations, a New York-based think-tank, argues that there is really only one way to blunt the weapon: use less of it. “We can produce more oil, which reduces our vulnerability a bit,” he says. “But the most important thing we can do long-term is consume less oil.”