On the surface, very little happened during the past week. Hurricane Dean did little damage to oil production and the next major hurricane of the year has yet to form. Oil prices gyrated in the low seventies in response to changing credit crunch news. For a while, Wall Street decided the credit crisis was coming under control and the stock market had some good days.

Beneath the radar screens however, there were a number of developments that could foreshadow important changes in our way of life, much sooner than we would like to think.

Starting with the credit crunch. Should a recession or worse be close at hand, the demand for oil, perhaps even from China, would likely slow and prices would drop – for a while.  Despite much optimism that the world’s central banks will soon liquefy the credit markets to the point that “sub-prime” would become a distant memory, many concerns are being raised.

We are beginning to learn that in recent years, some parts of the mortgage industry turned itself into a giant “ponzi” scheme in which highly profitable sub-prime loans that were likely to default, earned large fees for their issuers. As long as the real estate market grew enough to cover the defaults, all was well. When the growing stopped, however, something bad was sure to happen. We are now arguing about just how bad the “bad” might be.

While Wall Street and its chorus spoke optimistically during the past week about how soon the Federal Reserve would revive the markets by reducing interest rates, European officials did not seem so sanguine. One after another they stood up to speak of a spreading and deepening credit crisis and warned that there was still much trouble ahead.

From the Middle East, there was little good news. The British seemed to have pulled out of Basra, turning the 1.5 million barrel a day oil-export city over to the Mahdi Army. Perhaps the Shiites can keep the oil flowing, but they have many enemies and rivals for the riches. Up in Baghdad the situation continues to deteriorate. Little electricity, gasoline, food or water is still flowing. The issue of the size and duration of the U.S. presence in Iraq seems to be coming to a head in the next few weeks as does the viability of the current government. Somewhere along the line, keeping the oil flowing is likely to become increasingly difficult no matter which faction is reaping the benefits.

Down the Gulf a ways, the Saudis have suddenly realized just how vulnerable their oil facilities really are. They are urgently expanding to 35,000 men their “oil facility protection force” – a 700 percent increase. Maybe Al Qaeda figured out that they would do infinitely more damage to industrial civilization by halting Gulf oil production than by fighting it out with U.S. Marines in Iraq. This shoe has yet to drop but when it does, the results could be devastating.

The U.S.-Iran nuclear dispute still bubbles along. The Iranians are trying to reach a compromise with International Atomic Energy folks in hopes of avoiding more burdensome sanctions, but Washington seems to be having none of it. Many pundits are convinced that President Bush will not leave office without trying to settle the Iranian issue by force.

A recent story in the Wall Street Journal talks about the likelihood and efficacy of an Iranian effort to close the Strait of Hormuz, which transits 17 million barrels a day, in response to an attack. The story seems to optimistically conclude that Tehran really can’t stop the oil, but might slow it down and certainly would put prices up.

Once we are past the hurricanes — none likely during the next two weeks – and the geopolitical threats, we get to the fundamentals of supply and demand. The oil market has been so fixated by the hurricane and credit crisis in recent weeks that little notice has been taken of a looming supply crunch. Last week’s market U.S. stockpile report had imports and crude stocks up a bit, but gasoline stocks dropping by a whopping 5 million barrels. Analysts think stockpiles will continue to drop in this week’s report, if for no other reason than a large amount of Mexican oil production was shut down for the better part of a week.

If we are to believe the pronouncements from a steady stream of senior OPEC officials, the cartel has not the slightest intention of raising production at the September 11 meeting. The likelihood of an imminent credit-crunch-induced recession seems far higher to OPEC officials at the minute than to Wall Street brokers. For OPEC, the credit crunch may be just an excuse to cover their inability to increase production, but it is a believable one with plenty of supporting evidence.

The 40 or 50 cent a gallon drop in the price of gasoline that has blessed American motorists since May seems to have resulted in record US gasoline consumption two weeks ago. Chinese imports too continue to break records.

All these developments clearly suggest that the supply shortages this winter that the IEA and Energy Secretary Bodman have been warning us about seem to be on track to actually occur. While the credit crunch may eventually lead to serious economic setbacks, given the momentum in world economic growth, it is likely to be many months before major reductions in the demand for oil products take place. In the meantime, prices are likely to rise in response to tightening supplies, hurricanes, or geopolitical problems – take your pick.

One commentator has already termed that-which-is-to-come as the “greater depression” to distinguish it from the problems of the 1930’s.