The next energy crisis could well be worse than the last. With the economy struggling to stave off recession, the stock market down 30% and the nation wrestling with bioterrorist attacks, events like energy crises don't seem so terrible. So, the attendees at the Portfolio Management Symposium in Orlando on October 24 sat spellbound but unfazed by a keynote address by legendary oil analyst Charles Maxwell, who spent the better part of an hour detailing how the world would experience significant declines in oil production over the next two decades.

Fluent in Arabic, the soft-spoken Maxwell was one of the few non-OPEC officials invited to attend the oil cartel's meetings in the 1970s. It was no accident that journalist David Halberstam chose to open his tome, The Reckoning, a nonfiction work about how American industry was suddenly challenged in the 1970s by the energy crisis and global competition, with an anecdote of how Maxwell, the sometimes absent-minded young oil analyst, would stop to think out loud while strolling down Wall Street, and other investment professionals would listen to him as attentively as the public would listen to Warren Buffett today.

Maxwell's message in late October was hardly optimistic. "OPEC sees a golden age dawning," he told attendees. Somewhere between 2005 and 2007, non-OPEC oil production is likely to start declining, and OPEC's clout will rise proportionately.

"OPEC is different from the organization we saw fall apart in the past," Maxwell, now an analyst with Weeden/Leuthold Research, explained. "OPEC has more political unity than I've ever seen." Venezuela's new nationalistic president, Hugo Chavez, has "buried the hatchet with Saudi Arabia," and the Iranians have rejoined the OPEC fold.

At present, many Americans are asking, "What energy crisis?" Thanks to a global worldwide slowdown over the past year, the softness in the current oil market is caused by "an underdemand," not an oversupply, Maxwell said. "We're not seeing a big change in supply. When the economy recovers, we'll see tighter and tighter supply. Demand will come back, and gas prices will move up next summer."

Meanwhile, OPEC is running near full capacity, with 75% of its excess capacity sitting in Saudi Arabia. Capital spending on new oil production was so weak for the last five years that it means there "will be no new oil coming on stream in the next few years," because it takes several years to bring newly discovered oil fields into production.

But there is a much larger problem looming. Simply put, it's highly probable that most of the world's elephant-sized oil fields have already been tapped, if not depleted. "Around the world, there are fewer and fewer real promising prospects for drilling," Maxwell said.

How finite the world's oil reserves are has long been a subject of debate within the oil exploration community. Maxwell recalled that in 1956, a respected Shell Oil geologist named Frank Hubbard wrote a book predicting that domestic U.S. oil production would peak in early 1970. The book sparked a heated controversy within the oil-drilling world, but Hubbard's prediction turned out to be off by only three months.

Halberstam may have titled his book on energy and global competition-the twin crises of the seventies-The Reckoning, but Maxwell views what happened in that era as the warning. The reckoning is still a few years away, though many Americans have lulled themselves into believing it's a lifetime away.

After 2005, Maxwell believes that U.S. oil production could start declining significantly. Asked by an attendee about the prospects for the Anwar in Alaska's National Wildlife Refuge, Maxwell replied there was probably only enough oil there to supply four months worth of U.S. domestic consumption. "That's significant for the U.S., but not big enough to really have an impact on world oil supplies," he said.

Surveying the landscape of non-OPEC oil producers, Maxwell noted that Russia, which provides about 25% of Europe's oil, should boost its production over the next few decades, but it may never get back to its peak of nine million barrels a day.

Other non-OPEC producers aren't so fortunate. The North Sea peaked in 1995 at 2.7 million barrels a day and is now pumping about 2.3 million barrels a day. Meanwhile, Mexico is five or six years away from its peak. In the southern hemisphere, Maxwell estimates Brazil's oil production will top out in eight or nine years, with Angola following a few years later.

In contrast, OPEC oil production is capable of increasing until sometime between 2020 and 2030. Today, OPEC produces 60% of the marginal barrels, and that's only likely to rise. "They'll be in a position to name the price," Maxwell forecast. "They won't kill the goose that lays the golden egg." But he added that, whether their math is correct or not, OPEC leaders believe they've been short-changed and maintain that the price of oil has failed to keep pace with inflation.

Even before the events of September 11, the rising role of Islamic fundamentalism was cause for concern among the cognoscenti. "Islamic fundamentalism is confronting the whole theory of the West," Maxwell explained. From the open and freewheeling process of democracy to the Coca-Cola culture, many Islamic fundamentalists feel threatened and offended by Western customs and values. "Muslims haven't been able to adapt their religion to a changing world," Maxwell argued.

For its part, America, from its consumer behavior to foreign policy, has been largely oblivious to energy concerns and energy politics. Bill O'Reilly of Fox News recently commented that if American soccer moms were given the choice of giving up their SUVs or wearing veils over their faces, they would choose the latter. While that claim is highly questionable, the willingness of Americans and their leaders to flout energy conservation has appalled the rest of the world. Because the only serious energy crisis afflicting America in the past two decades has been the California electrical power crisis, even American policy makers have been lulled into a false sense of security.

Maxwell also wondered whether the United States will be able to count on the Middle East for oil and continue its support for Israel. "We have sent the Israelis into Asia. We like them because they are like us philosophically. However, it's seen as a European threat to Islam," he explained.

The problem goes well beyond U.S. relations with Israel. Given the possibility of government instability and upheaval throughout the Middle East, the political situation there could get very unpredictable. "We're assuming that when we need that marginal barrel of oil, they [OPEC] will supply it," Maxwell continued. "But anti-Americanism is pervasive in Iran, Iraq and Saudi Arabia. We can get those barrels of oil, if we conform politically and do what they tell us. That will trouble many Americans. Either we are a great power, or we're not."

But Western experts on the Islamic world are hardly infallible. Less than one week after Maxwell spoke, tens of thousands of spontaneous demonstrators took to the streets of Tehran to protest Iran's fundamentalist dictatorship, praise America and demand a more secular government. Go figure.

There are, of course, ways out of this predicament, but Americans have chosen the easy course: procrastination. "We're a democracy," Maxwell said. That means the United States would prefer to avoid difficult decisions at almost all costs. Until "we get bopped on the nose," Maxwell lamented, the world's only superpower prefers to live in denial.

"If we and Europe could reduce our oil demand by 20%, the difference would be huge," Maxwell declared. But such a strategy would entail changing our lifestyles and building codes, downsizing cars and penalizing SUVs. Whoever becomes an energy-efficient nation first would have a major advantage and, quite probably, a huge new export industry. If America could get "in an energy-efficient mode first," it could show the rest of the world the way.

That's not as far-fetched as it sounds. Ford Motor Co. has developed fuel cells that practically triple a car's energy efficiency, although at present, the cost of production makes them prohibitively expensive. A move to coal and natural gas is also possible. During World War II, Germany and South Africa managed to convert coal to gasoline. Since then, scientists already have figured out how to convert corn to gasoline via ethanol. "A clean coal-burning technology would be huge," Maxwell said, because the United States has enough coal to satisfy its energy needs for about 800 years.

But some alternative-energy sources may prove disappointing. Despite billions in investment, solar energy's applications may be limited. Maxwell estimated that solar energy would solve only about 2% of the world's energy needs.

Ultimately, any move to reduce our oil dependency before we are forced to would require active government policy, quite possibly including a controversial gasoline tax. European countries, recognizing how vulnerable they are to foreign oil supplies, impose huge taxes on gasoline, resulting in pump prices that are triple what Americans pay. It's hard to see U.S. politicians putting that in their campaign platforms.

If anything, however, our government prefers to shield consumers from the true cost of oil. The 1991 Persian Gulf War, which cost U.S. taxpayers about $62 billion, was largely about oil. Over the last 10 years, the United States paid, on average, about $20 a barrel for oil. If one were to amortize that $62 billion over that period, the cost rises about 50%, to $30 a barrel. Presumably, without such a de facto subsidy, American consumers probably would have purchased fewer SUVs and behaved more frugally.

Then there's another alternative. At some point in the next decade or so, Maxwell anticipates a serious or semi-serious public dialogue on whether "to launch a massive military campaign to conquer and hold the oil fields." The United States could "make Saudi Arabia the 53rd state," Maxwell noted. If extending our Bill of Rights' protections and other constitutional provisions to Saudi Arabia proved culturally problematic, it could also become a territory a la Guam.

This sounds ludicrous, and Maxwell seemed to feel that way, too.

"Ultimately, Americans won't be able to live with that," he said. "I don't think we can abandon our moral positions, seize oil fields and remain the country that we are."

If the OPEC nations have us over a barrel, they also are heavily indebted to the West and need to recycle their petrodollars to remain creditworthy. Some observers, like the editorial page writers at the Wall Street Journal, recently opined that Saudi Arabia needs us as much as we need them.

But as Maxwell observed, there is a larger issue. Thirty years from now, even the Middle East will start running low on oil, which has been the lifeblood of Western economies ever since it was discovered in Titusville, Pa., 140 years ago. "Out of this will emerge new types of oil companies," Maxwell predicted. Companies with huge amounts of tar sands and heavy oils, like Canada's Imperial Oil and Suncor, could be huge beneficiaries. So could the oil-service companies that will be hired to extract every last drop from the world's wells.

The gas lines of the 1970s seem a lifetime away, but it may be dÈj vu all over again sooner than we think. The day when the world is going to have to find a replacement for oil is closer than most Americans think. It's remarkable how little progress has been made on this front in 140 years.

The opportunity for new technologies to replace depleting resources like fossil fuels is likely to create new industries-and tremendous investment opportunities-that someday will surpass the oil business in size and scope. But it's going to take significantly higher prices to get there.