Egyptians are about to find out that it is a lot easier to eradicate your local dictator than feeding your population. The crush of poverty is felt under the weight of a population of 80 million people who live in a country where average annual rainfall is less than two inches and where only 3% of the land is arable. Aside from a narrow strip along the life-sustaining Nile River, Egypt is basically an inhospitable desert.

Yet the population of Egypt has tripled to 80 million today from 27 million in the early 1960s. While the birth rate for an average Egyptian woman has fallen from six children  to just over three, it  still fuels more than 2% annual growth in the population. At this pace, Egypt’s population will double to 160 million by 2050.

But the country is already importing 40% of its food supply and 60% of its grain. Even a brutally repressive regime like Hosni Mubarak’s still spent 7% of the country’s GDP on food and energy subsidies. Can a replacement regime afford to spend more?

Not likely, particularly when the country’s oil production peaked in 1996 and has subsequently declined by 30%. Oil exports are down 50% thanks to strong demand for its subsidized fuel.

The problem facing Arab countries today is higher oil prices feed directly into higher food prices.  While oil may be massively subsidized in the Middle East, it’s not in major grain exporting countries such as Canada, Russia and Australia that Arab nations increasingly count on for their food supply.

From the diesel fuel that runs tractors and combines to the power needed to pump water through irrigation systems, modern agriculture is one of the most energy intensive industries. And the Middle East is the largest food importing region of the world. As the price of oil goes up, so does the price of food imports.

Egypt’s problems feeding runaway population growth is not unique to the region.. They are in evidence throughout the Middle East given the masses now out in the streets in Libya, Algeria, Yemen, Jordan and Bahrain demanding regime change. Could Saudi Arabia be next?

Population growth in the Middle East is rapidly outstripping the carrying capacity of the land. Democratic reform may be what is on the protestors’ lips but demographic reform  is at the heart of the region’s problems.

Soaring oil prices also transfer billions of dollars of income from oil-consuming economies to oil-producing economies. Nearly one trillion dollars migrated from OECD economies to OPEC ones in the record run-up of oil prices preceding the last recession. Since savings rates in countries like Saudi Arabia, UAE and Kuwait are typically ten times what they are in major oil-consuming economies like the United States or Western Europe, the shift in purchasing power resulted in weaker global demand.

But by far the greatest impact that oil price shocks have on the global economy is the one they make on inflation and, hence, interest rates. This linkage is the means by which they have typically delivered a mortal blow to economic growth. Oil shocks have always given rise to growth-ending increases in interest rates as central banks are forced to respond to the inflationary fallout they leave behind.

The last recession was no exception. As oil prices soared from $35 per barrel in early 2004 to almost $150 per barrel in the summer of 2008, consumer price inflation in the US tripled to a rate of almost six per cent. It didn’t take long before interest rates caught up to inflation and, in the process, blew up the massively over-leveraged subprime mortgage market and the economy with it.

But lest we’d forgotten, it was the massive rise in energy inflation, and an associated rise in food prices (more on that in future posts), that catapulted the Federal Reserve Board’s federal funds rate from a nurturing one per cent setting in early 2004 to a level over five times that only a couple of years later. The rate of energy inflation rose from less than one per cent to as high as 35 per cent.

Oil prices caused the last recession, and oil prices will cause the next one as well. Energy inflation is already on the march. In fact, this time around oil prices are rising much earlier and much more rapidly than they did last cycle. Inflation is already running at nearly a five per cent rate in China; as oil prices go on to set new record highs, it’s only a matter of time of before we see those inflation rates in North America and in the rest of the OECD.

And when we do, get ready for another oil-induced global recession.

In the EIA base case, electricity prices in the US are basically flat for the next two and a half decades, thanks to cheap natural gas, while oil prices don’t even get close to their 2008 peaks until way off in 2035.

To top it all off, despite this new world of cheap energy, carbon emissions in the US economy don’t grow. (Since the EIA is counting on no less than 5 million barrels per day from the Alberta tar sands, the same cannot be said for the Canadian economy.) American emissions remain below their 2005 peak until 2027, even though no caps or trade policies are assumed to exist, and even when the agency is forecasting an almost 30 per cent increase in national coal consumption over the period.

With fossil-fuel energy abundant, and carbon emissions remarkably self-contained, the forward-looking EIA expects only a marginal increase in the contribution from renewables, whose very viability is challenged in the absence of public subsidies.

A doubling in estimates of shale gas reserves drives much of the energy abundance the EIA predicts. Whether shale gas turns out to be the game-changer the agency claims or the gas industry’s version of the subprime mortgage market will ultimately depend on where its true cost curve lies.

If it’s really in the neighborhood of $4 per 1000 cubic feet (Mcf) then there is enough gas to keep the lights on in America for years. But if the true cost curve lies closer to $8 per Mcf (even before environmental costs like local groundwater contamination are factored in), then gas may not be as abundant as the EIA believes, and long-run electricity prices may not be nearly as cheap as forecast.

Either way, as I noted months ago in my post about Boone Pickens’ plan, shale gas doesn’t address the emerging shortage of the liquid fuel that is needed to power the 250 million vehicles or so that run on US roadways.

Which bring us to the EIA’s oil price forecast. Measured in today’s dollars, the agency doesn’t see oil getting to $125 a barrel until 2035. The $125-per-barrel oil price that the EIA has spotted on the very distant 25-year horizon, I believe, will actually be staring the agency in the face within the next twelve months. I leave it to others to assess what that will imply for the credibility of the rest of the EIA’s outlook.

For many people, the fact that oil prices fell below $40 per barrel during the depths of the last recession meant that oil had no business ever trading at triple-digit levels in the first place. For them, $147-per-barrel oil was just a speculative bubble that, like all bubbles, inevitably burst.

Few could deny that speculators weren’t long oil when it soared to almost $150 per barrel, just as they were short oil when prices came crashing down. But focusing on the role of speculators is very much putting the cart before the horse.

What folks don’t mention is that when oil prices eventually crashed during the recession, so did oil demand—and not just speculative demand, but real economic demand. That’s what happens when essentially oil-powered economies experience severe contractions. In 2009, global oil demand fell for the first time since 1983—a testament to the severity of the last recession.

While drivers may have liked the pump prices that came along with the recession, oil producers certainly didn’t. Investments in future production, from Brazilian deep-water to Canadian tar sands, were slashed literally overnight as the price of oil fell well below the cost of developing new supply.

As I’ve said before, peak oil isn’t a problem if the economy it’s powering is shrinking. Triple-digit oil prices are only a problem if we want the economy they’re fuelling to grow. And most of us do.

As I’ve also said previously, the first thing you identify in an economic recovery, even the most anemic one, is that the economy starts burning more oil. The next thing is that oil prices start rising rapidly. Already they’re at more than double the levels of the last recession’s lows, and that’s with most major oil-consuming economies (including the world’s largest oil guzzler, the US) still operating well below their pre-recession levels.

Movements in oil prices have never been linear in the past, and there’s no reason to expect them to be so in the future. The interaction between genuine market forces and financial speculation is a fact of life in virtually all commodity markets.

Speculators have been in the oil market before, and guess what? They’ll soon be back. And it will be the same pull as ever—that of a world ever more desperate for the increasingly expensive fuel that got them on the price bandwagon last cycle and that will soon draw them back again.

Double standards aside, though, Congressman Waxman and Governor Schwarzenegger needn’t worry about growing American dependence on dirty tar sands fuel. TransCanada Corp.’s proposed Keystone XL pipeline, connecting as much as 900,000 barrels a day of oil from the tar sands to Texas refineries, isn’t going to have much flowing in it if oil prices stay where they are today.

Even without a cost for carbon emissions or water pollution, the economics of the requisite production increases just won’t fly. Not when the cost curve lying between today’s production of a little over one and a quarter million barrels a day and tomorrow’s target of three million barrels a day is steeply ascending, driven by the need to pursue ever-deeper bitumen deposits even further away from available water sources like the already heavily tapped Athabasca River. As energy guru Matthew Simmons once wryly observed, “In oil exploration, you don’t leave the easiest for the last.” It’s not a coincidence that two of the largest and oldest producers, Syncrude and Suncor, are located almost kitty-corner from each other across the banks of the Athabasca.

The Alberta tar sands are not a new discovery. As early as 1920, there was a pilot plant that first extracted oil from the bitumen. The only thing new about the tar sands is that they are now considered a commercially viable source of oil supply. Until the oil prices of the last several years, they most definitely weren’t.

And they still won’t be if prices retreat to where American motorists would like them. If you doubt that, just look at what happened in Alberta’s tar patch during the last recession, when oil prices plunged to $40 per barrel. Some $50 billion of capital spending was cancelled overnight. The stampede to the exit doors was as frantic as the earlier rush in, when oil rose to almost $150 per barrel.

America isn’t the only customer for the fuel, either. Sinopec and the China National Offshore Oil Company (CNOOC) have made substantial investments in the tar sands recently. And Enbridge wants to circumvent American carbon opposition and build a pipeline to get things flowing to the Pacific coast at Kitimat, B.C., for transoceanic shipment to China.

Many have questioned whether the expansion plans for Alberta’s tar sands are environmentally sustainable. But what potential American or Chinese customers must realize is this: without their paying ever-rising prices for that fuel, the tar sands may not even be economically sustainable.