Iran has threatened to close the Straits of Hormuz if attacked, cutting off a quarter of the world's oil supply. Such a move could drive oil to $200 or higher, bringing the global economy to its knees.
The International Energy Agency yesterday slashed its forecast for oil demand growth by over 3m barrels per day (bpd) by 2012 as economic growth slows and consumers take drastic steps to cut fuel use, but said the oil market would remain "tight" because of supply shortfalls.
"Over 3.5m bpd of new production is needed each year just to hold steady," it said. China's imports will rise from 4m to 5.7m bpd within four years.
"With oil prices hitting $140 we are clearly in the third oil shock. Truck drivers are going on strike. Airlines are closing down," said Nobuo Tanaka, the IEA's director.
Lower demand may help ease strains in the crude markets - lifting spare capacity to 4m bpd - but will merely defer a deeper crisis caused by lack of investment.
The Kashagan oil field in Kazakhstan is unlikely to produce much before 2013, while Russia has hobbled its oil sector with a costly tithe. Its output will fall below 10m bpd a year by next year. Matters would be worse without biofuels, which will reach 1.9 bpd in four years and make up almost half the growth in non-OPEC supply growth.
Even so, Sheik Ahmed Yamani, Saudi Arabia's former energy tsar, said the oil spike feels very different from the 1970s when there was a lack of supply.
"Now it is because of problems with the price-setting system in the futures market. Traders buy and sell depending on rumours, not supply and demand. So much money is flowing into the market, it's almost like gambling," he told Japan's Nikkei Net. This is the "OPEC View".
The big western oil companies, however, blame the demand in Asia, the Mid-East, and Latin America - and the refusal of the petro-states to open up to western know-how. The IEA said it was facile to blame speculators.
"All producers are working virtually flat out and there is no sign of any abnormal stockbuild giving a strong indication that current prices are justified," it said.
Hedge fund managers questioned this on Capitol Hill last month, saying the price would fall to $60 overnight if there was a clampdown on trading. It is a fine line between speculation and the activities of pension funds buying long-term futures, but there can be little doubt that financial flows have begun to distort the market.
Spain's industry minister, Miguel Sebastian, told the World Petroleum Congress that investors were using 850,000 bpd, enough to upset the wafer-thin balance.
The US Congress passed a bill last week authorising - or pushing - the Commodity Futures Trading Commission to take "emergency" action to halt the alleged abuses. This has not been done for nearly 30 years.
The most likely option is to tighten margins on futures trading, which was used in 1980. It is unclear whether this would work today.
Paul Horsnell, commodity chief at Barclays Capital, says speculators are now net "short". If so, higher margins would force them to cover positions, pushing prices even higher.
Oil prices fell back in late trading, with Brent up $2.54 to $142.37 in London, and sweet crude in New York $1.93 higher at $141.93.
