Oil prices rose to a peak of US$145 per barrel in July and are currently trading at close to US$100. Despite the recent moderation, the current (US dollar) price is around 30 per cent higher than a year ago, and more than 250 per cent above the level five years ago. While the appreciation of the Australian dollar over recent years has helped to lessen somewhat the effect on Australian businesses and consumers, Australian dollar oil prices – in real terms – are nonetheless now around their highest levels on record. This article discusses the forces behind the sharp increase in oil prices in recent years and the impact of higher oil prices on the Australian economy.