Andrew Walker
Economics correspondent, BBC World Service

The oil market is volatile at the best of times. But the last year has been extraordinary even by those standards.

A year ago the price came close to $150 a barrel. At that price even many oil producers thought the commodity overpriced.

And yet, some analysts were forecasting $200 a barrel before long and oil producers were under international political pressure to do something.

Producers, however, had such little spare capacity that there was not very much they could do.

King Abdullah of Saudi Arabia, the world’s largest oil producer, hosted a conference in Jeddah in June to discuss the problem.

He needn’t have worried, at least not about high prices.

In the event, a recession undermined demand for energy and sent the price diving. Since then it has dipped below $40 and is now back to about $70.

Oil’s impact

Oil prices have been a factor, sometimes the most important one, in several recessions over the last few decades.

But was oil the reason for the recession this time

While the oil price was high it added to business costs and left consumers with less to spend on other items, including perhaps mortgage repayments.

So the price of oil might have contributed to the financial crisis, or at least exacerbated it.

Price rebound

The subsequent partial recovery in the price reflects several developments.

Recent news suggests the economic situation might have stabilised (or at least is deteriorating more slowly), which suggests demand for oil might do so too.

TAKING THE PULSE OF THE GLOBAL ECONOMY

• The BBC is Taking the Pulse of the Global Economy, looking at a range of subjects this summer
• Food prices – which remain a concern particularly in many developing economies
• Highly volatile energy prices – which have been a major issue in the past year
• The plight of migrant workers – as the global recession takes hold in many economies
• Housing markets – which have turned from boom to bust in many countries
• Rising unemployment levels – as firms cut back because of falling orders

BBC World Food Price Index

Taking the pulse explained

Central banks policies to expand the money supply and heavy government borrowing have begun to raise concerns about future inflation.

Buying oil and other commodities could provide some protection against that for investors.

Opec, the oil cartel, has recently cut production and member countries – unusually – implemented many of those cuts.

Member states are often tempted to produce more than their allocation to get the extra cash.

The relatively high compliance by Opec this time round probably reflects the alarm they felt as the price dropped rapidly.

"It’s amazing what a good dose of fear can do," says analyst Julian Lee, at the Centre for Global Energy Studies.

Reason why

There is also a view that the wild swings in prices are due to speculation in the commodities markets.

It is a perennial complaint from Opec.

This may be partly a position intended to deflect attention from Opec at times when prices are rising, whose line is "don’t blame us it’s those speculators."

But it is not just Opec. Some analysts think there is something to it, others says the price swings largely reflect what they call fundamentals.

However it is certainly true to say that there is speculation in the oil market. But does speculation really explain the big price swings Opinion is divided.

Where next

Opec’s Secretary General Abdallah Salem el Badri said recently that $70 was a price that didn’t damage the economy, but did allow Opec members to invest and get a reasonable income from their oil.

But many analysts think that some countries need a higher price – $80 or more – for the government spending they want to implement.

There is also a question of whether a lower price provides sufficient incentive for investment in exploration and exploitation of new oil fields.

Forecasting the oil price is a risky business.

But it is reasonably safe to say that one of the key factors will be when and how strong is the global economic recovery. Opec’s actions will also be important.

Click here for more from BBC World Service on Taking the Pulse of the Global Economy
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