by Dan Gardner

OTTAWA - The bad news is it's much worse than you think. Oil, that is.

Yes, we all gasp and weep at the pumps. But that's just a little taste of what record-high oil prices will inflict in the coming months and years. Oil is a component in almost everything we consume -- from food to plastics -- and so the pain in the gas tank will slowly radiate into every aspect of our economic lives.

With everything costing more, inflation will rise. And when inflation rises, interest rates must follow. Remember that the last oil shock of this magnitude -- the crisis of 1979-1981 -- ultimately pushed mortgage rates toward 20 per cent. Even half that rise would make millions of people suffer in ways they haven't for a generation.

And that's not all, my friends.

As former employees of GM and Air Canada know, record oil prices are already gnawing at the economy and killing jobs, but what we've experienced so far is mere foreshadowing.

"The U.S. economy has managed to avoid feeling the full brunt of oil prices over the last few years," write Avery Shenfeld and Meny Grauman in a CIBC bulletin, "but 2009 will be the year that its luck runs out."

A recent Maclean's cover featured a disconsolate man with a gas nozzle pressed to his temple. It's an understandable sentiment, particularly after one reads the accompanying story, which suggests the damage done by the oil shock will fall somewhere between the catastrophic and the apocalyptic.

Truly, it's the end of the world as we know it. But as the song says, I feel fine.

Like it or not, this had to happen. Our economy is largely built on a single, finite energy source that is heavily concentrated in dangerous lands far away. That's not a stable foundation. It was bound to crack and crumble. The move to an economy built on more diverse energy sources -- a more stable and sustainable economy -- was inevitable.

That should have been obvious after the oil shock of 1973. It should have been doubly clear after the 1979 shock. And triply so when anthropogenic climate change became established fact.

But we were complacent. From the mid-1980s to the early part of this decade, we could have taxed the bejeezus out of oil and poured the proceeds into mass transit and alternative energy research. But we North Americans chose the easy way out: to let prices fall, to have more vehicles than children, and to build sprawling cities where every quart of milk and visit to the gym requires someone to fire up an internal combustion engine, belch crap into the air, burn more of an irreplaceable resource, and bring climate change a little bit closer.

So now, it's 25 years after the last oil shock and our energy foundations are cracking and crumbling. Oh well. It was inevitable. And desirable.

Yes, desirable. A lot of pain will come out of this, but also a lot of good.

Obviously, there will be big improvements in energy efficiency and innovation. In 1979, soaring oil prices immediately spurred huge gains that steadily grew until the price collapsed in the mid-1980s -- and the gains were lost in the witless gluttony that followed. If today's prices keep climbing and never turn around, we will not have the option of returning to witless gluttony.

A nice little side-effect: Greenhouse gas emissions will be reduced immediately, with future gains as new technologies come on-stream. Those who care about climate change, the fate of the planet, etc., should be pleased with this.

A somewhat less obvious benefit is the smack in the face urban planners are about to receive. As the cost of transportation rises, people will value housing nearer to their work. Urban design that brings homes, shops and employers closer together -- and allows people to get around on feet and bicycle wheels -- will flourish. Suburban monocultures and soul-crushing commutes will slowly shrivel.

High oil prices will also challenge China's unhealthy dominance of global manufacturing. Why do cheap Chinese goods flood every market from Nome to Nigeria? In part, because cheap oil made global transport cheap -- and so the fact that Chinese factories are very far away from the markets they swamp didn't add much to the cost of Chinese goods. Soon, it will matter. And local manufacturers will get a little breathing room.

It's the same story on food production. With cheap oil, it didn't matter whether apples are grown 100 miles from the consumer or 10,000. With expensive oil, it will. And local farmers will reap the rewards.

Then, there's the effect on the world's thugocracies. Not coincidentally, oil-producing countries typically have brutal or corrupt governments. Every barrel of oil we don't consume is a barrel of oil they can't use to entrench their power. A cheap, mass-market, electric car will be the ultimate weapon against thugs everywhere.

And let's not forget congestion. Transportation infrastructure is so overloaded that airport departure times increasingly resemble guesstimates. Fewer air travellers may mean fewer flights -- and lost jobs -- but it will also mean more efficient travel, which is good for economies and harried travellers alike.

The same change will come to our roads. In a recent analysis, the CIBC's Jeff Rubin estimated that if gas goes to $7 a gallon in the U.S. -- as he expects -- "we are likely to witness the greatest mass exodus of vehicles off America's highways in history. By 2012, there should be some 10 million fewer vehicles on American roadways than there are today."

A similar effect should be seen in Canada, too, because our gas prices, although higher than in the U.S., are still cheap relative to other developed countries.

As private transportation declines, demand for mass transit will surge. For a politician, that means votes and so governments will respond. Expect steady, sustained investments.

To see what lies in store, compare Caracas and Oslo. Caracas, the capital of oil-rich Venezuela, is notorious for its awful traffic jams; Oslo, the capital of oil-rich Norway, is a model of clean and efficient transportation. Obviously, there are many factors at work in this contrast, but a major one is the price of gas: Venezuelans enjoy the cheapest gas on the planet thanks to massive state subsidies; Norwegians have long endured some of the stiffest prices at the pump, thanks to heavy gas taxes.

We may fantasize about paying Venezuelan gas prices -- 25 cents a gallon -- but it is Norway's high-cost policy that delivered the dream.

And finally, and perhaps most fundamentally, there's economic and political security. The more we rely on oil, the less secure we are. The more we diversify our energy sources, the less vulnerable we will be. It's that simple. And thanks to the current oil shock, we will diversify. Whether we like it or not.

Like an addict kicking a habit, we will have to go through a period of painful withdrawal. But the good news is that, in time, we will all agree it was for the best.

Gardner writes for the Ottawa Citizen.
© The Leader-Post (Regina) 2008