So there I was down my local, having a quiet pint, when I felt this nudge in the back.

“Oi mate, what’s all this writing about gold malarkey? You should be writing about black gold, not the shiny stuff. It’s like doing a feature on whether Chelsea will win the Premiership next year whilst Man Yew are running away with the title this year. Get a grip!”

He had a point; since breaking the magical $100 mark back in February there’s been no sign of vertigo from the oil barons. People said it wouldn’t last, it was only a wild fling and that common sense would prevail. Yet the black stuff hit a record high on Wednesday, pushing above $115. So is this a bandwagon worth jumping on, or is it just about to run out of fuel?

But first, if you only think of oil as something you rub into your missus on a Sunday night, it might be worth having a glance at our beginners’ guide, A Cruder Way To Trade.

30-Second Guide To What’s Happening
The weak Dollar is playing a major role here. Also, there are ongoing worries about whether enough oil is being produced to satisfy demand, in particular from China. There’s a lot of hot money backing the trend. This is because oil, as a commodity, and a significant component of the inflation index, is a great hedge against inflation; Secondly, the lack of confidence in other investment markets, like corporate bonds and equities, is pushing money in the direction of the oily well.

This week saw the 3 lemons on the fruit machine all in a line. The Dollar hit a new low against the Euro as European inflation rose to 3.6%; the screens were awash with reports of supply problems from oil producing countries. Then on Wednesday, the weekly inventory figures showed a massive shortfall in supplies of crude oil and gasoline. Kerching! You’ve just won a $115 per barrel payout.

Is It A Quasi-currency, Like Gold?
Oil is a bit more confusing than gold; not long ago there used to be something called Petrodollars. These were the proceeds, in Dollars, that the Middle Eastern countries received as payment for oil; this payment was then promptly deposited in the bank (or Treasury Bills) of the paying nation (which often meant the USA).

But things have changed. For a start the Middle Eastern countries decided that they could do other things with their money, and consequently get a better return on their investment. Some countries, like Iran, even insist on being paid for oil in Euros rather than Dollars.

And more recently oil itself has benefited from trading as a currency, called ‘Not The Dollar.’ Yep, it’s no coincidence that the rise in oil from $50 to $115 has come as the Dollar has plummeted against all major currencies. Traders now trade oil, like gold, as a hedge against a falling Dollar.

Supply-Peak Oil Theory
Like all theories, and daytime telly, a lot of rubbish is spoken. The theory is that we’ve nearly used up all the cheap to drill stuff mother earth provided from dead dinosaurs and plants. What’s left is the expensive to drill stuff, like the Canadian tar sands. But, like debates on global warming, just because a clever person says something doesn’t mean it’s right. We don’t know how much oil is left, partly because there’s still plenty of parts of the world without holes in.

Just this week there were claims from Brazil of a magical new oilfield, which, if true, would be the world’s biggest discovery in the past 30 years. The thing is, the companies involved are playing down the announcement, made by a Brazilian who was long of oil shares. There just haven’t been enough exploratory drillings to confirm speculation of reserves equivalent to 33 billion barrels. And the reason why drilling is taking longer is because this reserve is somewhere in the Atlantic Ocean, off the coast of Brazil, deep down below the seabed.

Russia, the world’s second largest producer, hit the headlines this week when a top energy executive warned that supply had peaked last year at 10 million barrels per day (the official view was that production was stagnating). The International Energy Agency confirmed that supply had dropped below year-ago levels for the first time this decade, though it couldn’t be sure that supply had peaked. Which is a bit of a bugger really, as the Western world had been relying on vast Russian oilfields to take care of the massive demand coming from China.

Not all the problems are down to diminishing supply; some of the problems are down to politics. For example some countries favour the Venezuelan business model; this involves private companies funding the messy business of exploration, then the host nation taking over the business.

Also Nigeria is crucial to the west as a way of reducing reliance on supplies from Russia and the Middle East. But besides the regular kidnappings and terrorist attacks there are problems with the government and its state-owned petroleum company.

A report just released on Nigeria has warned that unless the government starts paying its way in joint ventures with the oil companies the country’s oil production could fall by a third by 2015 . Wow! This isn’t what the world wants to hear.

Russia, which last year produced 10 million barrels a day, will only be able to supply 8.5-9 million bpd over the next 20 years if billions of dollars are invested in exploring the sunny heartlands of Siberia. The thing is, the investment sums needed are even bigger than the sub-prime write-downs from across the Pacific Ocean. Russia can only get that sort of money from the international financial markets, but this isn’t easy when it’s as welcoming as Naomi Campbell with no luggage and a bad case of PMT.

Demand For Oil
The demand pattern has shifted since the millennium; the crucial difference this time is that the US, Britain, Germany, Japan and other rich OECD countries are no longer the driving force in the oil market. The US added just 7pc of total demand growth from 2004 to 2007, compared to 34pc for China, 25pc for the Mid-East and 17pc for emerging Asia.

Many Middle East countries now offer oil price subsidies to their own people. This works in the same way as a drug dealer handing out free samples to kids, they become hooked. These policies have led to much higher oil consumption in OPEC countries and will keep lots of oil from ever reaching the export market.

The US Driving Season is about to kick off (starting on Memorial Day at the end of May and finishing on Labour Day at the start of September). This is a quaint US custom when apple-pie families jump in their hummers and drive to a different part of America for their annual 2-week vacation. We have something similar over here called Easter when we all park our cars on the motorway.

The oil market always gets in a tizzy about the driving season; how much of the world’s supplies will be burned in pursuit of fishing trips, reaching that mountain hot-dog stand and searching for Elvis?

But I wonder whether if recession is really on people’s minds will they still be out driving? Or will they stay at home playing sub-prime Monopoly?

OPEC
OPEC, which pumps more than a third of the world’s oil, insists it is supplying enough oil. However, figures from the International Energy Agency show that OPEC production has fallen marginally in both of the past two months. Regardless of what they say, members of OPEC have no economic reason for dropping the price of oil and every reason for keeping it high. Be prepared for a showdown next week when energy ministers of the world’s biggest producing and consuming countries will gather for pizza and Cianti in Rome.

My View
So what do I reckon? Well, let’s look at the two main drivers, the Dollar and the supply/demand equation. I’m no oil baron and I don’t have a Scooby-do about the supply side, other than I’m sure there’ll continue to be disruptions from various geo-political forces.

On the demand side, I’m willing to believe that, even though China’s growth has ‘collapsed’ to only 10.6% in the first quarter, it’ll keep putting its hand up when the oil monitor walks round.

The past 12 months suggest that the price of oil is inextricably linked to the fate of the Dollar. If the Dollar continues to fall then oil will keep on rising. If, on the other hand, we see a turnaround in the Dollar’s fortunes then be careful, we could get an oil leak.

Me? Buoyed by my success in guessing the direction of gold in last week’s article (Missed The Gold Rush?), I’m going to stick my money on the black. Yeah, I reckon oil’s in for a further spurt.