The run-up in oil prices over the last 16 months qualifies as an economic shock. The longer they stay high, the more trouble there will be for the global economy.

Oil plays a vital role in the growth of the world economy as it is mostly used as an energy source for industrial, commercial, and domestic purposes. It has been the single most important determinant of the global economic activity over the years. It is estimated that 40% of the world's total primary energy demand is met by oil. That makes the global economy vulnerable to any event that affects oil supply and demand. Given this, a stable oil market is a prerequisite for an orderly global economy and steady growth. In the last three decades, the world economy has witnessed four major slumps, which were preceded by a surge in oil prices, which dragged the global economy down. The boom in the 1990s was accompanied by low oil prices for most of the decade. In fact, the movement of oil prices has been the best predictor of recessions in the past 50 years.

At present, the US light crude is hovering at its 13-year high at around $38 to 40, the highest since 1990. The sky-high prices are threatening to raise the ghost of oil once again. The reasons for this sudden price jump are attributed to China's emergence as a major oil consumer, the growing demand from the world's largest consumers, the US and Japan. Besides, it is also attributed to the fact that the countries having the largest oil reserves, Saudi Arabia and Iraq, are not in a stable condition; the oil cartel, OPEC, has been trying to control prices by adjusting agreed output quotas.

However, unlike in the past, the present spike in oil prices is not backed by sudden supply disruptions like war but by stronger demand. As the US oil demand is at an all-time high and the world's workshop (China) is importing more and more oil to keep its stunning economic growth intact, the million dollar question now is how will the oil prices move in the coming years and their implications for the high consuming countries, including India.

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