It seems only yesterday that we were wringing our hands as oil prices hit $100 a barrel. Back then, many hoped this was a temporary aberration. Now it looks as though oil will be trading at $120 a barrel within weeks as prices hit $113 earlier today. The US Department of Energy is expected to report a tightening of the oil supply later today.

The simple explanation is that there is a long-term problem with supply. Oil and gas are finite resources. If some of the people who have them don’t want to sell (even if one asks nicely, as Gordon Brown tried yesterday) supply will be limited and prices will go up. The current situation is rather more complicated.

Firstly, a lot of the trading in oil has been prompted by wider movements in the markets. Today, the dollar slumped, which made oil – priced in dollars on the world markets – cheaper for holders of other currencies. During the turmoil of the past few months, oil has seemed like a relatively safe way to make money. Open interest in crude oil options traded on the New York Mercantile Exchange has surged by 20 per cent from the start of 2008.

Yet many of those trading in oil and driving prices up are trading with margins rather than paying the full cost of a barrel. This makes it more likely that, once oil prices peak at about $120, they will fall sharply, probably below $100 a barrel again. It is difficult to ascertain how much of this sort of trading has been happening in recent months, but it has been happening, and it means that the current price is artificially inflated.

We are unlikely to see $70 a barrel oil again, unfortunately. High oil prices affect everyone from the man at the pump to the chief executive of easyJet, and they are with us to stay.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts