The Coming Energy Wars

No industry will be unaffected. Any company that moves goods or people needs oil. At $200 oil could make the long-predicted death of Detroit, or at least one of its Big Three, a reality. Airlines are vulnerable too. Skyrocketing jet fuel prompted American to announce it would cut flights due to the grounding of numerous older, less fuel-efficient planes. Air France-KLM recently warned that profits are likely to fall by a third this year, and CEO Jean-Cyril Spinetta suggests $200 oil would represent a far bigger shock than 9/11 or the SARS epidemic of 2003, which sent the airline industry into a tailspin. "It's more than a change, it's a revolution, a new industry, in fact," says Spinetta. "We would have a lot of bankruptcies very rapidly in Europe, the U.S., and Asia. And there will be restructuring of networks, cutting routes, cutting capacities." The effect of mergers and cutbacks may leave smaller cities from Tuscany to the American Midwest with ghost airports.

The oil-induced depression of the American consumer may be a harbinger of what's to come elsewhere. In the United States, consumer confidence is now at a 15-year low. Energy Department data show that $4-a-gallon gas is finally forcing Americans to cut back on driving; this year gas consumption in the country is expected to drop for the first time since 1991. No amount of "fiscal stimulus" looks likely to help: Citibank estimates that even if prices merely stay as they are, the year-on-year increase in the U.S. consumer-gas bill will siphon away the bulk of the $120 billion in expected tax rebates. As food and gas prices go up, spending on everything else will go down. No wonder big-box stores like Wal-Mart are having record quarters, and middle-market chains are suffering.

Expect these trends to hit Europe soon, too. Germans are actually beginning to slow down on the autobahn to save fuel, which has risen in price from 0.92 to 1.53 euros per liter since 2000 (a 66 percent increase). Analysts say that the more Europeans spend on gas, the less they will spend on furniture, clothing and white goods. Indeed sales in all those categories are already down. "It's going to feel like a global recession inside many companies," notes Citibank European equities economist Richard Reid. "We expect an increase in corporate failures, and a lot of M&A. You might well see flush emerging-markets firms [think Tata] swooping in to buy up ailing Western firms on the cheap."

With oil futures up 40 percent in just the last two months, the sense of an accelerating shock is already palpable in the United States. While American automakers were moving slowly toward smaller cars before the spike, sales of SUVs and pickups are now falling so fast, they appear to be caught flat-footed. "At $200, GM tanks," says energy expert Philip Verleger. "They just don't have time to fix their fleet." Ford CEO Alan Mullaly, warning two weeks ago that he no longer expects a return to profitability in 2009, said he believes the gas-price shift is permanent. Ford has slashed production of its F-series pickup trucks, an American best seller for 20 years. Meanwhile, Nissan unveiled a $115 million new plant outside Tokyo designed to build lithium-ion fuel cells to power a new generation of battery cars.

The individual decisions about what we'll drive, how often we'll fly and whether we'll upgrade our televisions as quickly are only part of the larger macroeconomic threat of higher oil prices. The threat has yet to be officially tallied; major financial institutions like Morgan Stanley have only just begun to seriously discuss the potential downgrades to the global economy should $200 oil become a reality. But already, it's clear that oil is catalyzing the threat of inflation in rich countries as well as poor. Inflation looks likely to be about 5 percent in the United States this summer, and about 3 percent in Europe. But in emerging economies, double-digit inflation could become the norm. "In America, it will feel like the opposite of the 1990s," says Morgan Stanley chief U.S. economist Richard Berner. "But if you think things won't be pleasant for industrial nations, think about developing economies, where people spend 50 percent of their income on food and fuel."

Indeed, there's concern that as higher oil prices force many Asian economies to reduce or even cut their generous fuel subsidies, growth will slow sharply, and there could be social unrest as the world's poorest become more desperate. The political ramifications of this (which already include moves away from free trade), combined with the ever-rising costs of doing business as usual, could force a retrenchment from globalization. "It's a harbinger of the reversal of globalization," says Jeff Rubin, chief economist for CIBC World Markets. "At $200 a barrel, you'll see transport costs rise so much that they will effectively reverse the trade liberalization of the last 30 years." He predicts that world trade will realign itself regionally, so that while Japan may continue to ship in goods from China, the United States will increasingly import from Latin America. "If you look at the period from 1973 to 1979 [when oil spiked] you'll find the same thing happened," he notes. "The share of imports to the U.S. from Latin America and the Caribbean rose by 6 percentage points. That was all about freight costs."