Higher Oil Prices Not Necessarily Shocking.

Much has changed in the decades since embargoes and war in the Middle East upset oil markets.

We've become much more energy efficient. Computers have made us more productive. And we've learned to temper our inflation expectations.

Consider that gleaming stainless steel refrigerator in your kitchen.

It isn't just the colour that has changed since you were a kid.

The average refrigerator is 70 per cent more energy efficient and nearly a third larger than in the early 1970s.

The transformation goes a long way to explaining why oil at more than $130 (U.S.) a barrel isn't likely to rattle the global economy as badly as the oil shocks of the 1970s and 1980s. The same holds true for cars, air conditioners and many other energy-sucking machines.

"Despite the surge in oil prices this decade, there are scant signs that the current oil shock is affecting the global economy in a manner similar to the 1970s," according to a report last week by Goldman Sachs economist Jim O'Neill.

It's true that the magnitude of the price spike is impressive. Oil is up nearly 50 per cent this year and 85 per cent in the past two years.

And adjusted for inflation, oil has never been this expensive.

But for pure shock value the recent runup pales compared to 1973 when oil shot up nearly fivefold (to $12 a barrel from $2.50), or 1979 when the price of oil more than tripled (to $40 a barrel from $12).

More importantly, the economy is better equipped to withstand energy price surges. It now takes about half as much energy to produce a dollar of gross domestic product than it did in the early 1970s.

Over the past three decades, global energy intensity - energy consumption as a percentage of GDP - has declined 1.5 to 2 per cent a year. And today's high energy prices are likely to make us even greener by spurring a new round of conservation and energy efficiency.

Already, there are tentative signs that consumers are reacting to higher pump prices. In recent weeks, U.S. sales of sport utility vehicles and pickup trucks have fallen sharply. Gas demand is also down a bit, but consumption has proven to be stubbornly inelastic in recent years. Longer term, higher vehicle fuel economy standards would significantly curb per capita consumption in Canada and the United States - the two biggest energy guzzlers among the world's largest industrialized economies.

A lot more needs to happen. Goldman Sachs points out that Japan has been leading the way in reducing its dependence on foreign oil. If the United States, Russia, China and India matched those gains, global energy consumption could be cut by 20 per cent. The latter three have not had the infrastructure of oil dependency and addition ingrained into their culture--yet.

Countries must resist the temptation to limit the price of gas. And countries such as China, which already caps gasoline prices, should relax those controls and let prices rise. This will encourage conservation and spur the search for alternatives.

Energy efficiency is only part of the reason we're better off than in the 1970s.

Our economies are more knowledge-based than industrial-based. The service sector has taken over from manufacturing as the primary economic driver.

As a result, the consumption of oil - and energy in general - is less of a burden on the economy.

In the United States, for example, oil consumption sucks up 5.75 per cent of GDP, compared with 7.5 per cent in 1980.

By that measure, it would take a price of $172 a barrel to feel like 1980.

Even then, it's unlikely that high prices will unleash the kind of virulent inflation that occurred in the past. The simple answer is that inflation expectations are much lower now. Neither consumers, businesses, nor investors expect to be paying substantially more for most of the stuff they buy in the months ahead.

"Inflation expectations are much better anchored now than they were in the 1970s and 1980s," according to Goldman Sachs.

Assuming the world's major central banks are successful in keeping inflation at bay, pricey oil could have a silver lining.

Conservation and efficiency will cut carbon-dioxide emissions and make the planet cleaner. The market is sending clear signals. We just need to heed them.

Governments must avoid the temptation to intervene, except to aid those least able to cope. Consumers must continue to make wise energy choices. And producers must reinvest more of their profits into the quest for unconventional and alternative energy sources.

That will keep this shock from becoming truly shocking.