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What happens then? While the futures market suggests that oil prices will head gently lower, many market participants are not so sure. Options markets suggest that the chances of a big rise in prices are greater than those of a big fall, with a 1-in-20 chance of prices being $100 a barrel or more in a year.

I’m not so sure. This is a nervy time for the global oil market, but the surge in prices has all the characteristics of a classic bubble. The International Energy Agency, in its latest oil-market report last week, said: “The unfolding statistical picture increasingly reveals that fear of the unknown and the consequent desire to make forward oil purchases is behind oil’s higher price path.”

It also warned that while the emphasis now was on the risks of higher prices, “as stocks and spare capacity increase, it must not be forgotten that the downside price risks will eventually emerge as well”. It predicts a rise in oil demand of 1.75m barrels a day in 2006, but a bigger increase in supply, split between Opec and non-Opec countries. Opec’s margin of spare capacity, currently a wafer-thin 1m barrels a day, will rise to 3m.

That does not mean oil prices are going to collapse. It does mean they are likely to return gradually to earth — which probably means a sustainable $40 a barrel — when geopolitical worries subside. That, in turn, will expose the fact that Britain’s higher inflation is largely an oil phenomenon, enabling the MPC to reduce rates further. And what if oil prices were to hit $100 a barrel? The Bank would need to cut in those circumstances, too, to prevent an already slow-growing economy sliding into recession. Either way, despite the Bank’s cautious message last week, this month’s rate cut will not be the last.

PS: Robert Solow, the Nobel prize-winning American economist, once gave us his famous productivity paradox: “You see computers everywhere, except in the productivity statistics.” How come, in other words, a labour-saving device as significant as the personal computer hasn’t made us all much more productive?

One theory was that office workers spend the time freed up by their labour-saving PCs bidding for things they don’t need on Ebay, planning their holidays, or playing patience. Work, or something like it, expands to fill the time available, which we used to know as Parkinson’s law.

This theory suffered a blow when America experienced a computer- related (or at least an ICT — information and communications technologies-related) productivity boom, beginning in the 1990s. The question then became: Why isn’t it happening here?

According to the Bank of England, British workers have the same amount of computer capacity as American ones. But while American workers have been turning in improved performance, productivity here stays in the doldrums.

The solution to the puzzle, according to the Bank, could be that there have indeed been significant computer-related productivity gains in Britain. Heavy ICT-using sectors, such as business services, finance and distribution, have been responsible for two-thirds of the new investment in this area. And, sure enough, productivity has improved markedly, particularly in the past two to three years.

The trouble is this better performance has been offset by declining productivity elsewhere in the economy. The Bank cites the construction industry’s poor recent record. I am sure readers can think of others.

Explore Economics

• Pre-Budget Report 2009

• Budget 2009

• World Economic Forum

• The Times MPC

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