There is an old English saying that 'whatever goes up must come down'. But what is worrying many economists and politicians is that, for the oil price at least, this is no longer true. It just keeps on going up. And up.

Already this year, crude oil prices have risen by 30 per cent to levels not seen since the mid-eighties. This rise in crude prices is reflected in the price that consumers pay at the pumps. In the UKpetrol prices have risen by 14 per cent since January. Prices at the pump reached an unprecedented £ (pounds sterling) 1.00 per litre sometime this week.  As of last week, some American motorists were paying $3 a gallon, some $1.20 more than a year ago.

So what is driving the relentless rise? It is the simple equation of supply and demand. Demand is soaring whilst supply is fairly static. On the demand side there is China: the country’s demand is up 20% over the past year. China’s rapidly expanding economy is consuming oil at unprecedented levels. Last year, it surpassed Japan as the world's second-largest consumer of oil and its thirst shows no sign of abating. Analysts believe China’s demand for oil will increase by five to seven per cent a year for the foreseeable future. If it does, China will surpass the Unites States as the world's largest consumer of oil by 2025.

US demand shows no sign of relenting either. The country’s demand has risen on the back of a strengthening economy and America’s love of gas-guzzling Sport Utility Vehicles (SUVs). Just weeks before Hurricane Katrina hit, car sales in the US reached their highest level since the consumer slump following 11 September 2001. A significant proportion of these were SUVs.

 On the supply side, even before Hurricane Katrina there were jitters over security of supplies from the Middle East, declining reserves in some key production regions such as Alaska and the North Sea and problems with America’s refineries.  Since the Hurricane, nearly a fifth of America’s refining capacity has been wiped out, compounding the problems. 

Although America’s refineries will be fixed in the weeks to come, there is a much greater problem with the oil price. What is really worrying oil analysts is whether the world is running out of oil. If it is, a significant moment will be when oil production “peaks.” When this happens and production starts to go into decline, even oil prices at $100 may soon be a luxury of the past. The global economy will then be in serious trouble.

A report in February commissioned by the US Department of Energy warned that “the world is fast approaching the inevitable peaking of conventional world oil production … The world has never faced a problem like this”.

Some say the “peak” will occur within the next five years. Others say it may not be until later. But one thing is certain: the day of peak oil is fast approaching. This is exactly at the same time as our demand for oil reaches record levels. World demand is set to increase by 54 per cent by 2025. To meet that demand, the world's oil-producing countries will have to pump out an additional 44 million barrels of oil each and every day by 2025.

This is at the same time as some oil reservoirs, on which we have depended for so long, are drying up.  Just how much oil is left underground is a hotly debated topic, and is central to the “peak oil” debate. The problem is that analysing just how much oil there is underground is an educated guess at best.  At worse, it is highly inaccurate. Just how imprecise the science is, was highlighted last year when oil giant Shell admitted that it had overestimated its oil and gas reserves by as much as twenty per cent. This admission caused outrage in the financial community and led to a legal suit that Shell has just settled for $9.2 million.

But what is really worrying the analysts is OPEC, which accounts for three quarters of the world’s oil reserves. “There are a lot of questions to answer over OPEC reserves," argues Bruce Evers of Investec Bank. "The quality of overall oil market data is poor, but with OPEC there remains considerable debate over the reliability of their reserve estimates."

And the big concern within OPEC is, of course, Saudi Arabia, that alone has 22 per cent of the world’s oil reserves. Saudi Arabia is the only country that has significant spare production. However, the issue of just how much oil the kingdom has locked away under its deserts is raised in a new book called “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.” The book has incensed the Saudis.

Written by Matthew Simmons, an energy advisor to President Bush, the book argues that far from having vast oil reserves, Saudi oil production has peaked or is about to peak. As a case in point, Simmons takes issue with just how much oil is left in the vast Ghawar oil field, which produces about half of Saudi Arabia’s oil.  Simmons argues that “twilight at Ghawar is fast approaching … the death of this great king leaves no field of vaguely comparable stature in the line of succession.” 

Due to the kingdom’s impending decline in production, Simmons says that the oil price will rise and that he is not talking about the “low” hundreds. The Saudis dismiss his claims, and other oil analysts say it will be a while yet before we reach “peak” oil.

Whatever is true, Hurricane Katrina is America’s wake up call to climate change. Many scientists and politicians believe that Katrina’s violent nature could be the result of climate change. "The increased intensity of hurricanes is associated with global warming” argues Britain’s Chief Scientific Advisor, Sir David King.

Recent scientific research has shown that there is an increase in the prevalence of destructive hurricanes because of climate change. High sea temperatures in the Gulf of Mexico turned Katrina from a “relatively small hurricane that glanced off southern Florida” to the “supercharged” destructive force that it became, argues Ross Gelspan, an export on the subject.

Hurricane Katrina has finally hit home to many Americans the dangers of climate change and rising carbon dioxide levels. Do not forget that President Bush, whose closeness to the oil industry is legendary, has refused to sign up to the UN agreement on climate change called the Kyoto Protocol. Another key anti-Kyoto politician is the Mississippi governor, Haley Barbour.  

The irony of this was not lost on American environmentalist, Robert F. Kennedy: “As Hurricane Katrina dismantles Mississippi’s Gulf Coast, it’s worth recalling the central role that Mississippi Governor Haley Barbour played in derailing the Kyoto Protocol and kiboshing President Bush’s iron-clad campaign promise to regulate CO2 [carbon dioxide]” he has written since the disaster. “Now we are all learning what it’s like to reap the whirlwind of fossil fuel dependence which Barbour and his cronies have encouraged”.

There are, however, radical solutions to the problem of rising oil prices and climate change. One is rapid disinvestment away from oil, to cleaner and greener technologies, such as renewable energy: solar, wind and biomass. The technology is there, it is just political will that is lacking. Another is much greater fuel-efficiency for vehicles. For example, new research shows that America’s cars and trucks are much less fuel-efficient than they were in the late 1980s.

It makes so much sense for the world to try and wean itself off its oil addiction. It would bring benefits from the Gulf of Mexico to the Persian Gulf. Firstly, because of dwindling supply; secondly, because of climate change and thirdly because of the Middle East. If America was not dependent on Middle Eastern oil, the region would be significantly more peaceful. It is a win-win scenario. We do not have to wait until the end of the oil age to act, because by then it will be too late. We do not even have to wait until the next hurricane, either. The time to act is now. That would bring the price of oil down.