Jeremy Warner's Outlook: The oil price will eventually return to earth, but collateral damage is likely to be serious

Here are a few reasons for not feeling too depressed about the ever-rising oil price, and a few others for being very worried indeed. For anyone who cares about the environment, high prices are obviously a potential force for good as they oblige consumers to treat fossil fuels as a scarce resource and either use less of them or seek out alternatives.

If I can't appeal to your altruism in thinking high oil prices a welcome development, then there is at least some comfort to be taken from the fact that the present elevated cost of oil is almost certainly not permanent. As the world economy slows, the best guess remains that oil and other commodity prices will follow the usual cyclical pattern of eventually falling back to more affordable levels.

Admittedly, these "normalised" prices are likely to be a lot higher than in previous cyclical downturns. Growing demand for energy from the developing world underpins a higher base price than historic norms. Energy usage in the United Arab Emirates is for instance doubling every five or six years. In the regions of mass population, such as China and India, it has also been rising strongly.

Yet whatever the demand/supply dynamic, there comes a point in all markets when price reaches the limits of the economy's capacity to pay. It's already happened with housing in America, Britain and many parts of Europe, where the same arguments about insatiable demand on limited supply as are now deployed by bulls of the oil price were once used to explain and justify ever-rising real estate prices.

As we now know, a large part of the house price spiral was down simply to a ready supply of cheap credit chasing an asset which everyone thought immune to Newton's law of gravity. As a consequence, ever greater quantities of money were poured into the market, until it eventually became essentially unaffordable. Prices are now correcting accordingly. Many of the same bubble characteristics are observable in the commodity markets, and particularly the oil price.

In the last year, the oil price has nearly doubled, a rate of appreciation which in absolute terms is without precedent. Admittedly, the oil shocks of the 1970s were in proportionate terms much worse. In the first of these shocks, the price quadrupled and in the second it doubled again.

Yet even accounting for inflation, the price today is much higher than it rose to back then. The effect, given the short time frame of the appreciation, could therefore be just as profound.

Western economies will be better at absorbing these increases than they were back then. Europe in particular is partially protected by the strength of the euro, which means the effective appreciation for single currency members is only half as much as it is in the US. All the same, the pain is already acute, with energy-intensive industries such as airlines facing profound structural change as they seek to adapt to expensively priced oil.

Though the focus of attention has been on the damage done to the full service airlines, the first casualties in the airline industry are likely to be among the low-cost operators, which rely on highly price-conscious customers. What's more, already finely tuned cost structures make it harder for them to absorb high fuel prices by economising elsewhere.

As energy and fuel bills rise, consumption is likely to suffer across the board, threatening a return to the "stagflation" of the 1970s. Even so, the West isn't as dependent on oil as it was back then and, as I say, per capita consumption of energy in the developed world is already so high that it can easily be reduced without causing undue hardship.

The pain caused in the developing world is, on the other hand, likely to be much more extreme. Here there is little room for reduced energy consumption. As higher energy and food prices eat into already squeezed family budgets, there is the threat of serious economic and social dislocation.

Yet the bull case for the oil price depends on this demand continuing to rise in an almost exponential way. In fact, very little has happened to the mix of supply and demand over the last year which in itself would justify a doubling of the oil price. What has changed is the willingness of markets to believe that growing demand underpins a permanently higher oil price. As with housing, that's likely to be only partially true.

As with all bubbles, it is impossible to know when prices will correct. The oil price could as easily go to $200 a barrel before once more returning to earth. Yet return it certainly will if it succeeds in pushing the global economy into recession. Central bankers seem to be succeeding in insulating their economies from the worst effects of the credit crisis. They may find the oil price an altogether tougher nut to crack.