EPA

SINCE prices peaked in July last year, and drifted steadily back down, analysts and consumers alike have been hoping that the painful days are behind them. No such luck. Late in January the cost of a barrel of crude fell to $50 or so, as an unusually warm winter allowed inventories to build. In the past couple of months, however, it has been steadily creeping higher. On Tuesday March 27th prices shot up by more than $5, touching $68.09, as escalating tension between the West and Iran over the kidnapping of 15 British sailors sparked fears of a military clash in the Gulf.

The spike was temporary, but prices remain at a three-month high of about $63 (see chart below). A war with Iran is not particularly likely, but even the faintest possibility is unsettling. Disruptions to Iran's big oil fields, and possibly to Iraq's, would be bad enough. But threats to close the Strait of Hormuz, through which roughly a quarter of the world's oil supplies passes, send shivers through oil markets.

Oil traders already have reason to feel nervous. Big producers in the Middle East and elsewhere are plagued by security woes. The bigger concern with Iran is how to tackle its nuclear programme, the source of long-term tension. Iraq looks as unstable as ever, and America's Congress is trying to fix a deadline for the withdrawal of American soldiers. PDVSA, Venezuela's state-run oil company, announced a sharp fall in 2006 profits on Tuesday, perhaps a sign that a lack of investment in the industry may be eroding the country's productive capacity. And there are anxiety-inducing predictions for this year's hurricane season in the Gulf of Mexico.

The impact of the bad news has been exacerbated because supplies were already tightening. OPEC producers, whose governments have grown reliant on high prices to shore up their domestic political support, have been keen to keep the cost of a barrel of oil above $50. And demand in the 30-odd developed nations that make up the Organisation for Economic Co-operation and Development (OECD) has been unexpectedly strong. The latest report from the International Energy Agency, which monitors stockpiles, suggests that OECD inventories fell by 8.6m barrels in January, as eager consumers drew down the supplies amassed during the warm days of early winter. As inventories are cut, the effect of bad news is likely to be felt more quickly.

It is unclear how well the world economy will hold up if prices get back to levels, as much as $78 a barrel, seen last year. During the appreciation that saw the oil price roughly triple between 2004 and 2006, economists waited with bated breath for an oil-induced crash. That never came. Now, in some ways, the world economy is better braced to absorb high prices. Europe's big economies show every sign of finally generating some domestic demand, as does Japan, which seems to have pulled out of its decade-long slump.

But in contrast the engine of global economic growth for the past five years, America, is now flirting with a housing-induced recession. If petroleum prices rise further, the world economy will need Europe and Japan to drive growth, as gas-guzzling America is looking vulnerable. Yet domestic demand in places like Germany and Japan needs to pick up quite a bit more yet, if America's overstretched consumers trim back.

More scary is if there is a sudden spike in prices. The 2004-2006 appreciation was rapid, but relatively smooth. Shocks like the Tuesday's after-hours surge will have a more disturbing impact, as buyers suddenly slash their spending, as happened in America after hurricane Katrina disrupted supplies. The threats in Iraq, Iran, and elsewhere, have arguable grown worse since last year. It may be time to put away the Hummer catalogue and to start looking at the price of ultra-economy cars.