Third oil shock may lead to solutions

In the early 1970s, a fourfold rise in the price of oil almost brought the world to a standstill. The shock of the Arab oil embargo left a deep mark in many countries: America subjected its cars to fuel-efficiency standards, France embraced nuclear power.

Thirty-five years later, oil prices have quadrupled again, briefly soaring to a peak of just over $135 a barrel. But, so far, this has been a slow-motion oil shock. If the Arab oil weapon felt like a hammer blow, this time stagnant oil output and growing emerging-market demand have squeezed the oil market like a vise. For almost five years, a growing world shrugged it off. Only now is it recoiling in pain.

Last week, French fishermen clogged the port of Dunkirk and British truck drivers choked roads into London and Cardiff. In America, falling house prices have left consumers resentful -- and short of money. Congress and presidential candidates have been drafting schemes and gas-tax holidays like so many campaign leaflets.

Gordon Brown, Britain's prime minister, thinks the big oil producers can be persuaded to come to the rescue. But only Saudi Arabia shows any enthusiasm for that. Elsewhere, output is growing agonizingly slowly. That is causing hardship and recrimination. But it also could come to represent an opportunity. The slow-motion shock seems irresistible today, but in time it will give rise to an equally unstoppable and more positive slow-motion reaction.

It is clear that high oil prices are hurting many economies -- especially in the rich world. Beset by scarce credit, falling asset prices and costly food, developed-country households hardly are well-equipped to foot the oil bill.

Stuck for answers, politicians have been looking for scapegoats. Topping the list are the speculators profiting from other people's hardship. But speculators do not own real oil; every barrel they buy in the futures markets they sell back again before the contract ends. That may raise the price of "paper barrels," but not of the black stuff refiners turn into petrol.

What about the oil companies, which have failed to increase output in spite of record profits? That accusation doesn't stand up to much scrutiny either. The oil price is set in a market. For Shell or Exxon to hoard oil underground would be to leave billions of dollars of investment languishing unused.

So the oil shock will take time to abate. In the meantime, governments should speed up the adjustment -- or at least stop delaying it. Half the world's people are sheltered from fuel prices by subsidies -- which, perversely, have boosted demand and mostly benefited the better off. Cutting fuel taxes in the rich world makes no sense either. There are better ways to return cash to struggling voters.

The 1970s showed how demand and supply, inelastic in the short run, eventually gives rise to conservation and new production. When all those new fields are on-stream, when the SUVs have been sold and the boilers replaced, the down cycle will take hold.

By then, the slow-motion oil shock could have catalyzed momentous change. It's no coincidence that car companies suddenly are accelerating their plans to sell electric hybrids that are far cheaper to run than gasoline or diesel cars at today's oil prices.