As I argued several years ago in my book, “Why Your World Is About To Get A Whole Lot Smaller”, triple digit oil prices will redefine our notion of an economic recovery because as soon as the global economy picks up, oil prices will quickly soar to levels that challenge growth.

Last year was a case in point. In the second full year of recovery from as deep a trough as any seen in the post-war period, oil prices once again rose swiftly to levels that, in the past, torpedoed economic growth.

Brent Crude, the world oil benchmark, averaged $111 per barrel. This cracked the previous record of an annual average high of $100 in 2008 – a peak subsequently followed by a huge global recession.

The North American benchmark, West Texas Intermediate (WTI), rose even more, increasing by 20% from its 2010 average price of $79. Even with the hefty discount that it traded to world oil prices throughout most of last year (at times over $20 per barrel), WTI still averaged just a shade under triple digit levels at $95/barrel last year.

Of course, there are always special factors to explain these price levels: the Libyan revolution, Iran’s threat to close the Strait of Hormuz, or an increasingly destabilized Iraq.

While all these events certainly pose credible threats to world oil production, they are, at the same time, background noise even if they dominate the front page.

The real story behind triple digit oil prices is not the threat of supply shocks, but the sheer, unrelenting rise in world oil demand.  Already closing in on 90 million barrels a day, the quick rebound in world oil consumption to new record highs demonstrates the global economy can’t grow without burning greater amounts of oil.

No matter how many rabbits the oil industry can pull out of its hat, be it tar sands from Alberta or shale oil from the Bakkens, supply just can’t seem to keep pace – at least not at the prices most consumers can afford to pay. That is the message that triple digit prices keeps telling us.

If the global economic expansion, troubled as it may be, continues, we will see even higher oil prices in 2012. But what does that say about the sustainability of growth?

And even if there is growth, what is the pace?

The fact that we’re seeing oil at triple-digit prices in this cycle should come as no surprise. After all, that’s where oil prices ended up last cycle before deep-sixing the global economy. But to see triple-digit prices again this early into what by all historical standards has been a painfully slow global recovery must be disconcerting to a world economy never hungrier for growth.

If merely getting back to pre-recession levels of global industrial production has oil knocking at the gates of triple digits, where do you think crude will be trading should we be fortunate enough to sustain this economic recovery for another year?

If anyone doubts how vital oil is to economic growth, just look at what happened last year. Global oil demand grew at two and a half per cent from the year before (almost double the International Energy Agency’s original forecast for 2010). China alone added almost one million barrels per day to its daily petroleum diet. Should demand grow by another two to two and a half per cent this year, crude prices could easily be taking out last cycle’s high of $147 per barrel. And if the speculators jump on the bandwagon, the forecast I made three years ago for $200-per-barrel oil prices in 2012 may yet pan out, the recession of 2009 notwithstanding.

But where would that leave the global economy? While economists may not formally consider oil as a factor of production, oil and economic growth are inextricably linked. In a world where conventional oil production hasn’t grown in over half a decade, that connection means that continued economic expansion can only be at ever-increasing wellhead costs and ever-higher crude prices, provided, of course, that soaring oil prices don’t do what they have always done before—cause major recessions in oil-powered economies.

Every major global recession over the last forty years has had oil’s fingerprints all over it. The first OPEC oil shock led to a devastating recession in 1973, only to be followed by the double-dip recessions on the heels of the second OPEC shock. When Saddam Hussein invaded Kuwait and lit its oil fields on fire, pushing oil up to the then unheard-of high of $40 per barrel, once again recession quickly ensued. And of course, when oil prices surged to a record-high $147 per barrel, the deepest post-war recession ever followed close behind.

So why should we expect our next rendez-vous with those prices to yield any different results?

The promotion of corn-based ethanol has been America’s principal policy response to its growing dependence on ever more costly foreign oil. Fuelled by a federal tax credit of 45 cents per gallon and a crippling 54 cent per gallon tariff against competing Brazilian sugar-based ethanol, American ethanol production has grown exponentially over the course of the last decade to around 12 billion gallons per year in 2010. And it’s targeted to grow to as much as 36 billion gallons by 2022. Food inflation, particularly with respect to corn prices, has moved in step. Thanks in large measure to ethanol demand, US corn prices are up some 40 per cent this year.

Food inflation aside, Congress had lots of other good reasons not to extend further subsidies. The net energy content from ethanol, after allowing for all the hydrocarbon inputs (ranging from fertilizers to diesel fuel for the tractors to coal for the processing plants), is marginal at best. And its carbon footprint isn’t materially better than burning fossil fuels, given how much of the latter is embodied in its very production.

Despite a last-ditch attempt by Senator Dianne Feinstein and others to end the subsidies, the Senate decided to fork out more pork barrel funds to corn farmers and, by extension, to firms like Monsanto and Archer Daniels Midland for another year.

But don’t count on American ethanol production’s ever coming even close to reaching that lofty target of 36 billion gallons per year. If the return of fiscal sanity to Washington doesn’t undercut its life-sustaining subsidies, an aborted recovery in motor vehicle sales will soon put the kibosh on future production growth.

Car manufacturers and ethanol producers both hope that an economic recovery will return vehicle sales to their pre-recession levels. Unfortunately, the recovery they are counting on so heavily is a double-edged sword.

An economic rebound will very quickly push pump prices beyond most drivers’ reach. They’re already hovering around $3 per gallon, and with triple-digit oil prices around the corner, we’re sure to see prices of $4 per gallon or higher by next spring.

The last time we saw those prices, in the summer of 2008, scooters were outselling SUVs by a margin of three to one, and no one was keen to scoop up car-leasing firms and make acquisitions like Toronto-Dominion Bank’s recent $6.3 billion purchase of Chrysler Financial. Four-dollar gas crunched the North American vehicle market back in 2008, and it will likely do the same in 2011.

And when it does, American farmers can go back to growing corn for food and, in the process, save taxpayers some $7 billion a year in ill-conceived ethanol subsidies.

That may come as a shock to those who thought the bloated oil inventories that came in the wake of the last recession would provide a buffer against future oil price spikes. Suddenly that buffer has literally gone up in smoke.

Refined oil stocks held by China’s two largest oil companies have fallen for eight consecutive months, while diesel stocks in the country fell 14 per cent in October. And the tightening oil market won’t just be felt in China. The 140 million barrels of international oil inventory sloshing around in floating storage on the high seas is also all but gone.

With oil prices within striking distance of triple-digit levels, don’t look for any price relief at the upcoming OPEC meeting in Ecuador. Venezuelan energy and oil minister Rafael Ramirez was recently quoted as saying that $100 per barrel was a fair price for both consumers and producers. (But not for cab drivers in Caracas, who will continue to be able to purchase their fuel at 20 cents per  gallon, the equivalent of a little over $8 per barrel). Meanwhile, King Abdullah of Saudi Arabia has already served notice that, without triple-digit prices, there is little incentive for new oil exploration in his kingdom.

In other words, without the return of the kinds of oil prices that put the world economy into the deepest ever post-war recession, we shouldn’t expect major oil producing countries to find and develop new supply. Yet according to the recently released World Energy Outlook from the International Energy Agency (IEA), world oil demand has never been more dependent on finding new supply.

How the goal posts have moved when it comes to oil prices and supply forecasts. Just as the IEA has finally recognized the reality of peak oil—at least insofar as affordable conventional oil is concerned—triple-digit oil prices have become the new normal in OPEC’s price expectations.

When both OPEC, an organization representing 40 per cent of world oil production, and the IEA, representing countries that consume roughly 50 per cent of the world’s oil, both now acknowledge the imminent return of triple-digit oil prices, perhaps it’s time our policy-makers should as well.

Our last encounter with those prices was brief but decisive. Oil demand collapsed, and, since oil powers our economy, so did GDP. What steps we have taken to ensure the same thing doesn’t happen again is far from clear.

That’s about to have a profound impact on where we source goods. The cost of shipping goods from Mexico or Central America to US markets is half the cost of shipping them from China, where most of them come from today.

How important those transport costs are in relation to total costs, and, hence, competitiveness, depends on one factor—the price of oil. Because no matter whether you move goods around the world by air, ship, rail or truck, you’re burning the same fuel.

Oil prices have diverted trade before, and they will again. After the first OPEC oil shocks, the share of non-petroleum US imports that came through transoceanic trade fell by 6 percentage points, while the share of imports from Latin America and the Caribbean rose by an equivalent amount. That shift, involving billions of dollars of trade diversion, occurred in little over half a decade.

In my book, Why Your World Is About To Get A Whole Lot Smaller, I argued that soaring transport costs driven by triple-digit oil prices will reverse the globalizing trends in our economy that occurred in the age of cheap oil.

New research by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) commissioned by the Canadian Foundation for the Americas tested my hypothesis by looking at the impact of different oil prices on regional competitiveness for eight industries.

In all eight industries studied (the production of baseballs, beer, circuit breakers, cotton clothing, gaskets and seals, optical fiber cables, orange juice and tobacco), researchers found that the import share in the American market from producers in Mexico, Central America and the Dominican Republic increased with higher oil prices.

As oil prices rose from $60 to $150 per barrel, the shift in US market share toward those countries steadily increased as transport costs became more and more important in determining relative competitiveness. In the case of cotton clothing, market share rose from 50 per cent to over 80 per cent. Increases in market share by nearer Central American suppliers came largely at the expense of market share held by distant Asian suppliers.

If the trade diversion suggested by past oil shocks and the recent analysis by ECLAC holds, much of the huge trade imbalance between China and the US could rapidly unwind, as transport costs shift sourcing much closer to home. At the same time, Mexico’s maquiladora plants may soon get another opportunity to shine as increasingly important suppliers to the American market.

While Mexico and Central America can’t compete with China for the lowest wage rates, they may not have to. Soaring transport costs may soon become the great equalizer, bringing factories much closer to the markets they serve.