The Coming Energy Wars by Rana Foroohar

Full article from Newsweek online here.

This spring, America hit a historic point. With average gas prices per gallon edging toward $4, America's notoriously profligate ways started to change fast. Americans are driving less, using mass transit more, buying fewer gas guzzlers, indeed shopping less wantonly in general, and lowering their previously unshakable confidence as consumers. Suddenly, Americans are acting differently; if not exactly like Swedes, then not quite like themselves, either. It's a shift that could change the world.

And there are more changes to come. So far the price shock has triggered the most obvious consumer shifts in the United States. Europeans, already greener, are also are buffered by a stronger currency, and Asians are protected from the spiking price of oil by subsidies that control the impact on gas prices at the pump. But if oil prices continue to rise, and the subsidy dam breaks, as seems likely, the energy revolution now transforming America will spread. "We sailed through $80 a barrel," notes energy authority Daniel Yergin, author of "The Prize: The Epic Quest for Oil, Money and Power" and chairman of Cambridge Energy Research Associates. "But that doesn't mean we'll sail through $200 a barrel. That sort of price would have enormous global consequences."

A year ago no one was talking about $200 oil, and now everyone in the markets is, for scary reasons. Oil prices climbed from $10 in 1999 to $95 last year without slowing the surging world economy, in large part because the markets believed the spike was at core driven by rising demand, particularly from India and China, which feeds growth. There was concern over supply, too, but nothing like the tumult prompted by the stranglehold OPEC imposed on the world in the 1970s, at least not until recent months. As the per-barrel price climbed over the last few months, with futures reaching $135 last week, the consensus began shifting to a new more gloomy view: that not only would long-term demand, led by China and India, continue to grow, but that the supply threats, including increasing conflict, falling investment, industry bottlenecks and downward estimates of big field reserves in major oil states—aren't going away any time soon. Now many (though not all) serious people take $200 oil—and the prospect of another '70s-style oil shock—seriously. Goldman Sachs warned that the $200 barrier could be hit within the next six to 24 months.
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That's way too fast for comfort (or should be) even for those who welcome high gas prices as a way to induce energy conservation and fight global warming. Already skyrocketing oil prices are causing real pain for ordinary people, threatening global economic growth, and reviving the specter of inflation. The price pressure is now particularly acute in big emerging markets like China and India, which in recent years had become paragons of fiscal responsibility that tended to dampen global inflation by exporting cheap goods and services. Now they threaten to become exporters of inflation, particularly if energy price controls give way. Americans now making up for their losses at the gas pump by flocking to Wal-Mart for cheap Chinese goods would be out of luck. Make no mistake: $200 oil in 2009 would be a painful shock, not just a green tax on gas guzzlers.