Senior Fellow Kevin A. Hassett

On July 26, 1956, Egypt decided to nationalize the Suez Canal. Within a few months, Britain, France, and Israel attacked, and thrust the world's most important oil-producing region into turmoil. With the superhighway for their oil tankers shut, oil producers cut production by 1.7 million barrels a day in November, roughly a 10 percent decrease in world oil production. Oil prices surged, and the economy dipped into recession in 1957.

Looking back at U.S. economic history, it is remarkable how many U.S. recessions followed an almost identical script. In 1973, it was the oil embargo. In 1980, the Iran-Iraq War caused world oil production to drop 7.2 percent. In 1981 there was a recession. Iraq invaded Kuwait in 1990, and a recession again followed. In each of these episodes, the driving force turning Middle Eastern turmoil into American economic dismay was the price of oil.

With this long experience in mind, it is natural that the media would treat the recent advance of the price of oil above $100 per barrel as the last straw in a series of economic misfortunes. Think of the U.S. economy as the mad monk Rasputin, with the sea of expensive oil replacing the icy river that finally delivered the already shot, clubbed, and poisoned monk to his maker.

Except that the oil story is much different this time around: There is every reason to expect that high energy prices will do far less harm to the U.S. economy than they have in the past.

The reason is apparent in the attached chart. It shows the relative increase in oil demand for many of the world's countries. For the large developed countries, including the U.S., oil demand has inched up only a smidgen in recent years. But the world's less-developed nations, especially China and India, have ratcheted up their consumption year after year. The size of this increase is astonishing, with China, for example, increasing its oil consumption a whopping 146 percent from 1993 to 2006.

Increasing demand puts pressure on supply and drives up prices just as effectively as a supply disruption. But when supply is disrupted, as it was by war in 1956, it is unambiguously bad news. When high demand drives up prices, on the other hand, the story is more ambiguous. Less-developed nations are driving up the price of oil because they are growing so much, but that growth produces higher incomes, and a swarm of new customers for the products produced by developed nations.

We often think that countries compete the way companies do, but the world doesn't work that way. When the rest of the world is reeling, our growth is lower and our recessions worse. With oil less and less important to our economy, its high price might even be good news.

Kevin A. Hassett is a senior fellow and director of economic policy studies at AEI.