Oil has wrong-footed even the most bullish analysts, having shot up an astonishing 85% over the past 12 months and 37% this year alone.

The rise has big implications for the economy and markets, so we answer your questions.

Why has the oil price gone up so much?

Demand is strong and supply is tight, but that’s only part of the story. Opec, the oil-producers’ cartel, has ruled out increases in production, while hedge-fund speculators have been blamed for pushing the price well beyond the laws of supply and demand.

Demand is certainly strong: the International Energy Agency estimates that global demand will rise to 86.8m barrels a day this year, up from 85.8m barrels last year, largely thanks to booming demand from industrialising nations such as India and China.

However, demand in North America fell about 3% in the first three months of the year. Growth in demand from China also slowed to about 3.7% in the year to April.

What’s more, 85% of global demand growth for oil over the next two years is from countries subsidising prices — China, India and the Middle East, according to Investec Asset Management.

However, the authorities are under considerable pressure to end the subsidies as the cost has just become too high.

All this suggests there should be downward pressure on oil prices, supporting the view that a large part of oil’s rise has been down to speculation.

Analyst Ed Morse at Lehman Brothers has warned that crude prices have developed into a bubble and he thinks the price could come back down to $80 next year.

His rival at Goldman Sachs, however, thinks crude could hit $200 over the next two years. As the investment bank behind the world’s biggest commodity index, however, it has a vested interest in talking prices up.

So what does this mean for my investments?

You probably have about a fifth of your portfolio in oil and mining stocks. Even if the price comes off, some analysts think oil firms have some way to go.

Robin Batchelor, manager of Blackrock’s World Energy fund, said: “Analysts continue to factor a long-term oil price of between $70-$80 into their valuations, whereas oil futures imply $125 until 2015. We can expect a strong re-rating of energy shares.”

It is probably too late to add additional exposure to energy to your portfolio, though.

What about the economy?

If oil continues at this level, consumers and companies will start to feel the pain through higher fuel costs. However, that will dampen demand and ultimately bring the price down.