Until recently, the received wisdom in the city was (a) that the steep rise in the oil price would be temporary, and (b) that it would only cause serious problems if it went to $150 a barrel. At least one of those two beliefs is now being tested. Possibly both.

After a brief period of treading water, the price of oil lurched up again yesterday, with Brent crude pushing back up toward the $120 mark. The last thing the Opec countries want is a market panic. That's why today you see talk of Saudi Arabia, Kuwait, the UAE and Nigeria all raising their production. But now the world is officially worried about the balance between oil demand and supply, I wonder how much long-term reassurance this can offer.

Consider, first, the question of how long the oil spike will last. I was struck by the Bank of England deputy governor, Charlie Bean's blunt answer to this in a speech at the end of last week:

"the bottom line is that while agricultural prices may fall back a little this year, oil (and also metals) prices are more likely to remain elevated. And there must be a risk that continued turmoil in the Middle East and North Africa results in a substantial oil price spike, present Opec spare capacity notwithstanding."

This chart of the oil price (below) over the past year or two shows how prices have leapt up in response to events in the Middle East. But you can also see how the oil price had previously been marching upwards, with no help from Colonel Gaddafy or anyone else.

Most economists were fairly relaxed about that earlier rise, because it was linked to rising demand from the emerging market economies, not disruptions in supply. But, as The Economist points out in its latest issue, a look back at history finds plenty of occasions when large increases in the oil price have been followed by recessions, when the root cause of the price spike was rising demand. All you need is for rising demand to collide with unresponsive supply.

The gap that's opened up between the US and global benchmark price of oil (WTI and Brent crude) shows how different supply conditions can have large consequences for the price. Prices are lower in the US because America has greater refining capacity - and it's recently tumbled on a lot of new supplies of natural gas, which US producers find hard to export.

Libya accounts for only about 1.5% of global production, or just over 1.5 million barrels per day. Reports suggest that production is now running at about a half or a third of that level. Somehow this has added nearly $20 to the cost of a barrel of oil.

Does the world have alternative sources to turn to, if Libyan production shuts down altogether - and/or the crisis hits production elsewhere? For decades the answer to the spare capacity question has always been Saudi Arabia. As long as supply was not disrupted there, the thinking was that everything would probably be OK.

As I said at the start, Saudi officials are doing everything they can to strengthen this belief. They have no interest in people losing confidence in the scale of their reserves. But there are plenty of long-time sceptics out there, who say the Saudis have been overstating how much oil they have left - and say now they're exaggerating their spare capacity as well. One Washington insider told me yesterday: "we're clear that the Saudi ability to make up for more than Libyan disruption is non-existent." Those doubts are helping to push up the price. No wonder they're rallying other Opec troops for the front page of today's FT.

Assume that roughly $120 per barrel oil is here to stay, with a strong chance that it will rise further. What does that mean for the global recovery? The answer is that no-one can know for sure.

Optimists point out that, historically, oil prices need to double in a year to cause serious bother. That's how you get that $150 threshold I mentioned at the start. Any number below $150, supposedly, the world is OK. Another point in our favour is that we are at the start of the economic cycle this time. Previously, higher oil prices have tended to push the world into recession when interest rates have been rising for a while and the recovery is fairly mature.

One estimate, from Fathom Consulting, suggests that a permanent 10% rise in the price of oil in the first three months of 2011 would not have much effect on global growth this year, but take about 0.2% off the growth rate next year. That's not nothing, but it's manageable. Whereas, in their model, $150 per barrel oil would cut growth next year by fully 1%. But as the authors admit, these things are rarely so clear-cut. And it matters a great deal where you are starting from.

Look around the world today, you see emerging market economies with an inflation problem, and rich countries who mostly have a growth problem. The worrying thing about an oil price hike is that makes both problems worse. It's especially worrying for the UK, which is in the unique position of battling slow growth and rising inflation.

That is why the past five global recessions have all been preceded by a sharp rise in the price of oil. They not only hit growth, they make it harder for policy makers to respond. Oil is the ultimate wild card for the global economy - and it's been a while since the UK was dealt a good hand.