Get used to it, high oil prices to stay!

OIL’S not called black gold for nothing. The cost of the commodity soared last week, reaching a record high of $66 per barrel on the New York Mercantile Exchange.

And the price shows no sign of correcting yet.

So what's going on? Why has the cost of the world's most needed commodity soared by 56% year to date?

Or by 106% in the past 24 months?

The answer's in the question: it's all about need, or demand.

Let's begin by looking at the key driver of demand for black gold: China. No analyst in the global financial community accurately forecast the growth potential of the Chinese economy when China began to open its market to the West we simply didn't have access to adequate statistics.

But it's gradually becoming clear that China is a colossal market, where every family aspires to own a car, a fridge, a television all energy hungry devices.

So in the market's defence, we couldn't have anticipated the level Chinese demand for oil when prices last stabilised after the Iraq war in the first quarter of 2003, and we certainly couldn't have anticipated the rate at which China would develop, and consume resources.

However, what we can now say with some certainty is that the price of oil is not going to correct back to the $25 range which was the norm two years ago, for a variety of reasons.

First of all, take the demand issue discussed above.

The world needs more oil than it has the capacity to refine, and the fear of a supply disruption is partially responsible for the current cost of crude.

Fears of more sinister threats to supply are also driving prices higher.

Last week, following rumours of terrorist threats to Saudi refineries, the cost of oil spiked.

Iran's decision to restart its nuclear programme also unnerved traders.

The global community is threatening to impose sanctions on Iranian exports in response to the nuclear programme, but Iran is one of the world's largest producers of crude sanctions on Iranian crude exports would send prices soaring.

And of course, energy demand always peaks during the northern hemisphere's winter.

Summer is bad enough peak driving season in the US sees Americans take to the highways in gas-hungry cars, and the hotter its gets, the more power is used to fuel air conditioners (remember the power shortages in California last year?).

But energy demand really peaks in the winter, when the northern hemisphere needs heat and light to cope with the cold and dark.

So the outlook for the weeks and months ahead seems set oil prices will likely test higher.

OPEC is pumping at full capacity, refineries are working flat out (and frequently breaking-down as a result), and tensions in the Middle East are once again rising, just when we in Europe and the US need oil the most.

Let's hope it's not a particularly cold winter.

The views and opinions expressed in this article are those of the author and do not necessarily correspond with those of Ulster Bank or any other member of the RBS Group.