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. Last Updated: 07/27/2016

High Oil Prices Fueling the Next Gold Rush

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The oil price hikes of the 1970s came to be regarded by major oil exporters as a mistake. Of course, they reaped enormous financial gains as oil prices rose tenfold between 1973 and 1980, but over the longer term the negatives outweighed the positives. The industrial world fell into a recession and oil demand sagged. Meanwhile, high prices encouraged new sources of supply as well as conservation efforts. By the mid-1980s, crude was down from over $35 per barrel to $15 to $20. It fell to $10 by 1999, matching pre-1973 levels in inflation-adjusted dollars. By then, even Saudi Arabia began to feel financial strain.

In the 1970s, people in the Arab world came to expect that oil would not only provide great wealth but would right the balance of power vis-a-vis the West. When this failed to happen, the resultant disappointment stoked Islamic militancy. It is no accident that Saudi nationals were so prominent among Sept. 11 hijackers and masterminds.

But over the past six years, oil prices have traced another upward trajectory. With forecasters talking of $105 per barrel crude, this would duplicate the tenfold-in-seven-years increase of the 1970s in inflation-adjusted terms. Oil exporters have enjoyed an enormous windfall. Russia's exports of oil, fuels and gas may reach $200 billion this year, versus $33 billion in 1999.

This time, moreover, the era of cheap oil appears to be truly over. Now, we have China and India, each with over a billion future drivers and homeowners.

Yet, there is one thing that should make oil exporters apprehensive. Ironically, it is the absence of inflation, which did so much to whittle away the value of oil wealth in the 1970s. Just as it did back then, the U.S. Federal Reserve has been printing large quantities of dollars to enable the United States, along with other oil importers, to pay for their oil. Three decades ago, that resulted in an inflationary explosion. This time, however, although consumer prices have picked up in 2005, inflation has remained modest. While in Russia, Venezuela and other oil-producing countries price increases are running at double-digit rates, global inflation has averaged around 3 percent.

Inflation is the dog that didn't bark. Over the past decade, the global economic environment has become highly competitive. Instead of passing on higher energy costs, producers have been by and large cutting their costs elsewhere. As a result, higher oil prices have been compensated by rising productivity and lower prices for other goods and services. In some countries, deflationary pressures endure, despite record-breaking oil prices.

A more flexible economy goes hand in hand with the emergence of an aggressive entrepreneurial culture in the 1990s. The revolution in information technology was driven not only by people with good ideas, but, more important, by the financial network underpinning the commercialization of those ideas -- from venture capitalists backing research to the stock market rewarding successful innovation. This entrepreneurial culture is responsible for accelerated technological progress in computers, electronics, telecoms, biotech and a variety of other industries. It is now fueling the next gold rush -- the race toward energy efficiency.

While eliminating our dependence on hydrocarbons will require a major scientific breakthrough, in the end it may not be necessary. High energy prices are already acting as a catalyst, spurring feverish work on energy-saving technologies in everything from cars to light bulbs. Oil exploration and extraction, too, are being revolutionized by new processes and methods. By 2010, the global economy will become vastly more energy efficient -- so much so that, despite projected new demand, a new oil glut will likely develop.

Typically, Russia has been profligate with its newly found wealth. Oil revenue is being misspent on short-term, consumption-oriented projects. Savings have been low, and little meaningful investment has gone into infrastructure, education or health care. If petrodollars keep flowing in, it will matter little. But if they dry up, Russia may once again find itself, to use the old expression, at the cracked trough.

Alexei Bayer, a former Muscovite, is a New York-based economist.