The almost universal opinion currently, expressed for example by Economy.com on a number of occasions this week, is that the current run-up in oil prices is a short term bubble, and that we are shortly to see its bursting, followed by a reversion in the oil price to its historically normal level of $20-25. I am coming increasingly to disagree.

In reality, oil prices are not particularly high. They are still in real terms well below their peak level of 1981, which equates to around $80 per barrel in today's money. While that was a spike, people forget that oil prices remained high throughout the first half of the 1980s, until a sudden collapse in the fall of 1985, which took them down from about $28 per barrel (say, $48 today) to the low teens - the equivalent of the $20-25 per barrel still regarded as normal by most commentators.

Thus oil prices remained above $40 per barrel in today's money, fluctuating as high as $80 and with sustained plateaus above $60, for a full 12 years, from 1973 to 1985. In principle, therefore, the normal price of oil may indeed be in the $50-60 per barrel range, or even somewhat higher, far above what we have been used to in the last two decades.

Unlike the run-up in oil prices in 1973-80, the rise in 2004 appears to have been very largely driven by demand. Traditionally, Saudi Arabia and other OPEC producers kept a reserve of about 5 million barrels per day in unused capacity, which could be brought on stream to meet any short term shortages. However, the rapid industrialization of China and to a lesser extent India is increasing demand for petroleum products to such an extent that this buffer is more or less gone - China's petroleum consumption is up about 18 percent on last year, a rate of increase we have never seen for such a large consumer.

Further, according to some calculations, we are within a year of having used half of all the crude oil to which we will ever have access. While the Saudi fields appear good for another century or more at their present pumping rate, it is thus unlikely that we will find new reserves quickly enough to replace those lesser producers whose fields finally begin to run out.

If this overall scenario is correct and oil prices are due for a prolonged period in the $50-60 per barrel range or even higher, then the energy market will have to adapt a new pattern of energy sourcing and usage. Sources of energy that have been hopelessly uneconomic at $25 per barrel become far more interesting at $60 per barrel, and we shall have to adapt accordingly.

One source of new energy that is not going to provide much relief is conservation. The United States has been built on the basis of readily available automobile transportation, never more so than in the euphoric growth in exurbs of the last decade. You cannot expect someone to live in Loudoun County, Virginia or Orange County, California and not drive to work. Further, the American public has indicated by its wholesale adoption of gigantic sports utility vehicles what it thinks of the government's attempt to get everybody into compact cars - for one thing, there is a serious safety issue involved.

Hence dreams of fuel conservation hatched by the socialists of the Upper West Side or the Rive Gauche can, except at the margin, be abandoned. A large increase in the federal tax on gasoline - maybe an extra $1 per gallon - can be brought in if you like; it will do wonders for the budget deficit, very little for oil consumption, and nothing whatever for the re-election prospects of the President or Congress that introduces it.

Unconventional oil sources will help somewhat at these prices. Canadian oil shale was held in the early 1980s to be viable at an oil price of $40 per barrel (equivalent to $80 today.) The price never quite got that far on a sustained basis. However, today shale oil recovery technology has improved, and consequently production is occurring from a pilot operation in the Athabasca region that is said to be viable at $25 per barrel - discount that claim somewhat as public relations hype, but production certainly seems to be viable at $40, below the current and likely future price.

Similar tar sands exist in the Orinoco region of Venezuela; of course Venezuelan president Hugo Chavez will have to be removed from power before too much reliance is placed on Orinoco as a potential source for the U.S. economy.

Here we come to the crux of the problem. It is far easier to find an energy source that can be used to generate electricity in a few large power stations or a steel mill, than to find one that can be carried around on a small scale and used to fuel an automobile. In the 1950s, people fantasized about nuclear powered automobiles; it's just not going to happen!

Coal and natural gas, both plentiful sources of energy in general, are also unsuitable for powering automobiles, because solids and gases present awkward materials handling problems at the micro level - regrettably, we will not in 2025 see roads full of Stanley Steamers! Thus we need to find either a product that can be mixed with gasoline in the automobile engine, thereby maintaining gasoline's materials handling advantages, or a means of providing partial or total battery power to automobiles.

Ethanol and synfuels, both heavily subsidized since the 1980s, appear to offer at best a marginal contribution to the problem. Both possibilities are too expensive to be viable without subsidy, and if they are to form more than a minor part of the automobile fuel mix would require substantial redesign of automobile engines.

In battery powered automobiles, after many years of slow progress, we have a genuine step forward with the introduction of the Toyota Prius hybrid electric/gasoline automobile, in which the battery powers the automobile at low speeds, the gasoline engine at high speeds, and the kinetic energy from braking is absorbed into recharging the battery.

This remarkably clever design, whose gasoline consumption is rated at 55 miles per gallon, at a recommended sale price in the United States of $21,415 costs about $4,000 more to the consumer than a regular automobile of the same class; unsurprisingly, given the rise in oil prices, there is now a waiting list for it. Usefully, the battery doesn't require overnight recharging, unlike previous electric automobiles.

For wealthier consumers, the Prius and its future competitors represent a major step forward, which will usefully limit oil consumption in the future. Switching affluent Americans to the Prius, and no doubt to its sports utility vehicle analogs, will not however be enough to solve the world's energy problem.

Nuclear power would alleviate the problem considerably, if it were possible to construct nuclear power stations in under a couple of decades. While the safety problem with nuclear power appears only modest, and containable (literally!) the environmental opposition is ferocious, if almost completely irrational, and hence delays construction of these very expensive facilities for a wholly uneconomic length of time. Given that nuclear power stations appear to have a useful life of less than 40 years, a 15-20 year total design and construction period puts them well outside the realm of economic usefulness.

Natural gas and hydro electricity are both wonderful sources of energy, but both are limited in volume or geography. The Russian natural gas pipeline to Europe, so opposed in the 1980s on Cold War grounds, is now a key element in Europe's energy security, but there seem to be only moderate possibilities for expansion in natural gas and almost none in hydroelectricity beyond what we are already producing.

Wind farms, the energy shibboleth of Tony Blair's government in Britain appear at first sight to be admirably environment friendly, but in a crowded country like Britain they are a huge aesthetic blot. In any case, few areas of the world have Britain's combination of lots of wind but only one hurricane in 300 years.

Tidal power, even in Nova Scotia's Bay of Fundy, with its 50 foot tides, is still close to the realm of science fiction as a large scale source. Nova Scotia Power's Minas Basin station in the Bay of Fundy generates only 20 megawatts, while somehow one knows that the world's only other significant tidal power station, Electricite de France's 240 megawatt station at St. Malo, France, is not economically viable if costed properly!

So we come back to coal - the 19th century's most technologically advanced energy source, the 20th century's most quantitatively important energy source and, in the 21st century, still where discussions of major incremental energy sources have to end up.

Coal is available from a wide range of places, most of them safely outside the control of OPEC, and although economist William Jevons wrote the first environmentalist tract The coal question in 1865, worrying about exhaustion of coal stocks, it currently appears that he was wrong, and that we are several hundred years away from that debacle. So in principle, coal usage could be expanded, at least in large scale applications such as power stations and steel production, as well as in the production of hydrogen, which can be used to fuel gas-powered applications.

Coal's main problem (apart from being annoyingly solid, so you can't use it to power an automobile without your own personal fireman) is the pollution it emits. Just when the coal industry thought it had solved the problem of sulfate emissions, with current technology able to reduce them by around 60 percent, compared to 1980 technology's emission levels, environmentalists came up with the problem of global warming and carbon dioxide emissions, so the coal industry was back to stage 1.

Of course, from the National Academy of Sciences' report of 2001, it is fairly clear that the global warming we have seen since 1970 is a direct result of having cleaned up coal users' sulfate emissions, since sulfates in the atmosphere cool it. However, people are unlikely to want to accept the tradeoff of higher sulfate emissions and the accompanying respiratory diseases, even for cooler summers, so another solution must be found.

Fortunately, the coal industry's efforts to clean up carbon dioxide emissions also appear to be bearing some fruit. According to the World Coal Institute, at least two thirds of carbon dioxide emissions can be removed at a cost of under $50 per ton of carbon dioxide, using the technique of carbon dioxide sequestration, in which the gas is pumped back into coal beds, depleted oil reservoirs or deep saline aquifers. The FutureGen project, a mixed public/private coal fired power plant of 275 megawatts expected to open by 2010, will sequester more than 90 percent of carbon dioxide emissions.

Since Professor William Nordhaus, who spoke at a Cato Institute seminar in December 2003, has calculated the optimum carbon tax as $10 per ton of carbon emitted, rising to $60 per ton in stages to 2100, the cost of carbon dioxide sequestration is at least potentially economically viable in the long run, although it may not be near-term. Nevertheless it is clear that moderate environmental goals can be met by coal fired power stations, and that the cost will be competitive, particularly if other energy sources remain costly.

As discussed above, the major growth in power usage today, and likely future such growth, comes from China and India, countries that are not bound by the Kyoto emissions protocol. Since the cost of capital in both countries is relatively high (making nuclear power less economically viable than it otherwise would be) coal fired power stations, using the best available technology to cleanse sulfur, nitrogen, particulates and carbon dioxide, appear the best solution to their large scale energy needs.

Together with the Toyota Prius and its rivals and successors, coal thus appears able to provide a medium term solution to the world's energy problems, even in an era of unexpectedly expensive oil. But it has to be said that the margin of safety between the various constraints we face is getting smaller, and that in the long run world population growth may be the biggest problem of all.

+ The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of sell recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.

+ Martin Hutchinson is the author of Great Conservatives (Academica Press, 2004) - details can be found on the Web site greatconservatives.com.

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