1973 or 1982?

In light of last week's events, it's getting harder to cling to my frequent assertion that we aren't living through a re-run of the 1970s, energy-wise. Not only are oil prices approaching their all-time, real-dollar highs of the late 70s and early 80s, but the outbreak of hostilities between Israel and Hezbollah raises the specter of past Middle East conflicts and their unpredictable outcomes. As markets try to assess the implications of all this, I find myself wondering if we are in another 1973--on the threshold of a massive global energy shock--or a 1982, a year in which Israel invaded southern Lebanon but the price of oil actually declined.

Nor have the leaders of the developed world come to grips with the core of the problem. Although the New York Times characterized it as heavily oil-centric, the Energy Communique from the weekend's G8 summit in Russia presents a solid list of appropriate longer-term energy focus areas, including data and market transparency, energy diversification and climate change. However, it fails entirely to connect the dots between the "high and volatile oil prices" that it cites as an important challenge, and the current geopolitical crises driving that volatility.

Even if we might be on the verge of another Middle East war, though, it's worth considering what's different, compared to 1973. We have a lot more cars and use a lot more imported oil now than then, as a result of a roughly 50% increase in population and policies that helped keep the price of fossil fuels low for two decades. But while our millions of SUVs get roughly the same fuel economy as the big sedans and station wagons of the early 1970s, many families also own a more economical car. The most popular "economy cars" thirty years ago barely achieved 30 mpg, but there are many models today that beat that figure handily, including hybrids that get up to 50-60 mpg. Nor were telecommuting and online commerce even an option back then. In a pinch, changes in established work and shopping patterns could deliver dramatic reductions in fuel consumption.

We also have a wider variety of available alternative energy options. Although gas- and coal-to-liquids and oil sands are all capital intensive, they are actual hardware today, not just long-term R&D projects. The same is true for wind and solar power, which can contribute by displacing natural gas that could be used to augment transportation fuels. Even if our attention has recently been diverted by hype about corn ethanol, the entire net energy contribution of which is equal to that of one good-size offshore oil platform, the prospect of practical cellulosic ethanol could revolutionize the whole biofuels sector. An oil shock today would cause a lot of economic pain, but it might just trigger the energy transformation that the previous one didn't.

Last week I observed that the fundamentals of the oil market were starting to look a little more positive, but for the moment that appears totally irrelevant. In a market in which between 25% and 50% of the price of oil is determined by risk, its near-term path will have little to do with actual supply and demand. The prospect of another major Mid-Eastern oil producer becoming involved in a war--if rumors of Iranian troops in Lebanon turn out to be true--could shatter all the old records. Or the current crisis will abate, and we will still be left with the riskiness of our ongoing problems with Iraq, Iran, Nigeria and North Korea.