Only a few weeks ago, it was the soaring price of fuel that was gripping the world’s attention.

Now a rapid decline in prices is delighting consumers and easing fears about global inflation. But what is behind this fall in oil prices, and can it continue?

Oil has fallen by almost 20 per cent since July 11 when it touched an all-time high of $147.27 a barrel. It was trading at around $118 this morning — a level last seen in May.

The decline has been prompted by concerns about a weakening global economy, which has led to a softening of demand particularly in the US and Europe.

Tony Hayward, chief executive of BP, said last week that the oil company had detected a drop in demand of up to 10 per cent in countries that are members of the Organisation of Economic Cooperation and Development (OECD).

“People are staying at home and being far more careful about the way they use fuel than a year ago,” said one energy analyst.

While oil consumption in China and India remains robust, a loosening of fuel subsidy regimes has helped moderate demand in those countries too.

Demand from China, in particular, is expected to fall over the next few weeks during the Olympic Games as the Government has ordered factories to close to improve air quality and because of public holidays.

Other factors are also at play.

A Saudi pledge in June to pump an extra 500,000 barrels of oil per day has helped to ease fears about a global supply crunch this year.

There are also signs that financial investors are exiting the market, helping to deflate what some believe may in part have been a speculative bubble.

Nevertheless, while the recent falls have been welcome, there is good reason to believe that oil prices are unlikely to fall to the levels consumers were comfortable with a few years ago.

The days of $30 or $40 for a barrel of oil are probably over. This is because the fundamental factors that have driven oil to such high levels remain in place, even against the background of a slowing global economy.

Booming demand for energy from developing countries is not going to abate soon. Meanwhile, constraints on global supply because of declining output outside the OPEC exporters' cartel, and a lack of investment in production and refining capacity are not problems that can be solved overnight.

Saudi Arabia is the only country in the world with the ability to significantly raise production quickly and most experts believe it is operating close to its current limit.

Some of the world's biggest oil companies, including Total and Chevron, have cast doubt over whether global production, which stands at around 85 million barrels per day, can ever exceed 100 million barrels, despite demand projections of as much as 130 million barrels per day within a few decades by the US Government.

It is worth remembering that oil at the current level of $118 per barrel, or even $100 or $80, is by historic standards extremely high.

Predicting where oil prices will head next is virtually impossible, but there is a compelling argument they will remain high for a sustained period.

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