At current levels of around $80 per barrel, oil prices have leapt nearly eightfold since 1998. Many observers would have predicted economic disaster from such a leap, but the global economy just keeps chugging along.

An interesting article in Saturday’s Wall Street Journal reports that many analysts figure that $100/barrel oil is on the way — and that the global economy will shrug that off, too.

I was working in Mexico as a finance reporter in 1998-99, and wrote some about the first stages of the oil rally. Back then, most analysts seemed to figure that oil would settle around $30. Below that level, the oil companies and producing nations wouldn’t make much money, and would thus cut supply. Above it, the global economy would slow as consumers and businesses cut spending, and demand would fall.

What happened? Why did oil demand keep growing right along with price, against economists’ predictions? Why didn’t U.S. consumers — whose zeal to keep taking on debt and shop till they drop has been a major driver of the global economy — not seriously cut back spending after oil hit $40, $50, $60, $70, and now $80?

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The question has a serious environmental angle. Many greens, including peak-oil types, have seen pricey oil as a panacea that will slow oil consumption and thus mitigate climate change. Yet that hasn’t happened.

The Journal article proposes an interesting solution.

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The Journal calls it "the Wal-Mart effect," and it goes like this:

For every extra dollar taken from drivers’ pockets at the pump in the form of higher prices in recent years, low-cost exporters from China and elsewhere have put roughly $1.50 back in the form of cheaper retail goods.

Wow. So cheap goods from China has more than offset the effects of pricier oil, allowing consumers to keep their feet on the SUV peddle even as gas prices skyrocket. China — that’s the first "c-word" I have in mind.

But that explanation raises a question: How does China keep rolling out the cheap stuff, even as petroleum prices rise? Wouldn’t higher energy prices mean higher prices for Chinese-made consumer goods? The Journal has an answer for that one as well: "China uses oil for only 21% of its energy needs, with most of the rest coming from coal."

Coal: my second c-word. You know, the enemy of the human race.

So, China’s vast store of cheap coal acts as the safety valve that allows oil consumption to rise even as oil prices rise. And the effect is starting to take hold even within China: the country can produce consumer goods so cheaply, and it’s so awash in U.S. dollars and euros from its export-led growth boom, that its own citizens are now snapping up cars and filling up their tanks. Here’s The Journal again (emphasis mine):

Strong growth in places like China helps take some of the edge off the oil-price blow for U.S. and European companies such as Detroit’s Big Three auto makers. Many emerging markets are hitting a "takeoff" stage, where per-capita income reaches a level that sparks serious auto demand, says Ellen Hughes-Cromwick, Ford Motor Co.’s chief economist. Growth in emerging markets is a "structural development" that is "less sensitive to oil-price changes," she says.

If corporate-led globalization means accelerating coal and petroleum use in an era of melting glaciers, might it be time to question some of its fundamental tenets?

On another note, the Journal article makes the interesting point that the ever-falling dollar pushes up oil prices.

Under pressure from the Nixon administration in the 1970s, the OPEC nations agreed to accept only U.S. dollars for payment for oil. So the dollar is the currency for the global crude market. And when the dollar’s value falls, the Journal tells us, producing countries make up the difference by boosting the oil price.

That’s an odd quirk I had never thought of. And there might be a feedback loop in place: Pricier oil puts upward pressure on the U.S. current account/trade deficit, which makes the dollar weaker. So pricier oil pushes the dollar down, and the lower dollar pushes the oil price up.

On the other hand, if the OPEC nations stopped demanding dollars and accepted, say, euros and yen as well, the dollar would surely tumble.

Makes the head swim.