There's something perverse about the behaviour of the oil price these days. The more that the oil-guzzling economies of the West slow, the higher the cost of crude spikes. Yesterday Brent crude hit a record high of $104.35 a barrel.

That partly reflects the shift in global economic power. The United States may be heading for recession, with Europe slowing too, but Asia is still buoyant, its appetite for crude undimmed. China's crude import volumes are still rising by an annual 14percent.

It is partly explained by the resistance of Opec to pleas for production increases. The exporters' club agreed last week to hold supplies at current levels. The US Vice-President, Dick Cheney, is on his way to Saudi Arabia to urge it to break ranks with other cartel members.

However, there is another factor. Speculators have sought out energy futures as a hedge against the weakening dollar and rising inflation. Being priced in dollars, oil is relatively cheap for investors using other currencies, particularly the mighty euro.

Rising crude prices are feeding through into the price of everything from packaging to diesel, leaving UK manufacturers facing the fastest growth in input prices for 22 years.

That spells trouble. Either firms will be able to pass on the cost to consumers - which is inflationary and would mean interest rates won't be coming down any time soon - or they won't, in which case their profit margins are going to narrow dramatically. Neither prospect is pleasant. A major slide in the crude price would be a blessing, and is not impossible, even though most forecasters see it remaining in the $80 to $110 range. However, crude oil predictions are notoriously unreliable. A decade ago it was hard to find anyone willing to bet that the crude price would go above a lowly $10 a barrel.

patrick.hosking@thetimes.co.uk

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