Hamish McRae: High prices won't stop the world going on growing

This time it is different. True, this is an oil shock akin to those that struck the world economy in the 1970s, for the price of oil – even allowing for inflation – is now a lot higher than it was at the 1979 peak. Those shocks pushed the world economy into two recessions, in the mid- 1970s and the early 1980s, and helped drive inflation into double digits in most of the developed world. Unemployment soared as interest rates were raised to try to curb inflation. But then the oil price fell back again as new fields came into production and countries made a start on conserving oil.

So will the surge in the oil price have similar consequences this time? It is a tough judgement because we don't know how high oil will go, but it looks likely that this oil shock will have a less damaging impact than in the 1970s. However, since the price is unlikely to fall back as far, it will have a more lasting impact on our way of life.

Since oil is the largest single source of global energy, larger than natural gas or coal, and far larger than nuclear or renewables, a rising oil price pushes up the price of everything, including food. That squeezes living standards still further.

As a result some countries may well be pushed into recession. There is a good chance that will happen in the US and maybe here in the UK, though in both instances the prime culprit would be the end of the housing booms. The surge in the oil price just happens to come at a very bad time. But even if this does happen there are a number of reasons to suppose that the world will continue to carry on growing, despite the pressure from oil.

One, of course, is the size of China in the world economy. Last year for the first time it added more demand for oil to the world than the United States. Demand from India, Russia and other large economies is strong too. The high oil price speeds up the shift of power from the "old" developed world to the "new".

Another is that inflation, while rising, is far lower than it was in the 1970s or indeed the 1980s. So there is much less need to crunch it down with high interest rates.

Still another is that the world is much better at conserving energy than it was 30 years ago. We use roughly half as much energy to produce a unit of GDP now than in the 1970s. But if we can probably cope better, we should not expect cheap energy to return for two main reasons. One is that demand from China, India and other fast-growing economies will remain strong: their growth will offset their efforts to conserve energy. The other is that there is no longer spare capacity; some geologists believe we may be close to peak oil production. Whether that proves right or not, there is certainly no easy oil to find and while alternatives such as biofuels are being developed they will take years to make a material difference.

In a way, though, this is good news. This time the world will be forced to continue its efforts to conserve energy. The market will drive us to reduce our carbon emissions. Many would say: about time too.

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