Instead, Asia proceeded to collapse economically. The oil industry was the first to feel the impact. Instead of rising, Asian oil demand plummeted, while output around the world continued to rise. The results: overflowing storage tanks and a price collapse that swept oil down to $10 a barrel from $27 in a matter of months. The consequences were the same as in virtually every other price collapse since "Colonel" Edwin Drake struck oil in western Pennsylvania in 1859. Smaller companies slashed spending to survive; larger companies postponed new projects. People were let go.

The industry restructured. Over the past few years, the dramatic decline in investment has meant less exploration and production, and the impact was quick. World oil production capacity today is almost 10%-eight million barrels a day-lower than was anticipated back in July 1997, prior to the Thai baht collapse. Meanwhile, over the past two years, demand has been showing increasing vigour, led, not surprisingly, by the strong recovery in much of Asia.

Until the additional supplies said to be on the ocean arrive, the market will remain very tight, and a market this tight is vulnerable to disruption and mistakes. Some combination of events-spreading Middle Eastern violence, Iraqi machinations, labour unrest in the Venezuelan oil industry, a logistical bottleneck in the oil transportation system could disrupt the supply system, and send prices over $40 a barrel, at least for a short time.

The impact of higher prices would be felt in rising inflation and falling confidence, which could unsettle financial markets and slow consumer spending, triggering the long-avoided downturn. Those risks are real. But part of the way to keep confidence on an even keel is to have a balanced perspective on what is unfolding. A temporary disruption or a panic in the paper market for oil futures would not mean a lasting crisis and would certainly not herald a permanent shortage. After all, the world has been running out of oil since the industry was founded.

In 1920, the US Geological Service warned that American reserves would be depleted in exactly nine years and three months. But over the next few years the opening of new territories to exploration and new technologies turned the expected shortage into a glut. In 1930, just as the feared date of exhaustion actually arrived, the industry was rocked by the discovery of the huge East Texas field. The ensuing flood of oil sent prices crashing down to 10 cents a barrel during the Depression and ended up, another decade later, being one of the most valuable resources for the Allies during World War II.

By the end of the tumultuous 1970s, it was common to tank about the industry falling off the "oil mountain" - meaning a deep decline in available supply. But, despite all the regulation and turmoil, markets worked and, at least in historical terms, rather quickly. New technologies were again deployed, pre-eminently on offshore reserves. New territories were opened up, and new, non-OPEC supplies developed. Meanwhile, demand was muted by higher prices and the very expectation of shortage. Within a few years, a new glut had built up, and prices collapsed.

In 1970, proven world oil reserves were 560 billion barrels. Today, proven world reserves have almost doubled to over one trillion barrels. Again and again, it turns out that one of the most difficult things to do is anticipate the impact of new technologies. Who in the late 1970s could have imagined the revolution in information technology that would, when adapted by the oil industry, so dramatically drive down costs in the early l990s? Whatever happens to oil over the next few potentially difficult months, the adjustment process is already in motion. High prices will modulate demand.

A financially reliquefied industry is gearing up to develop new supplies. Of course, this does not happen overnight. In an industry this complex, there is an inevitable lag time. The industry is somewhat more cautious than in earlier periods. Also, response speed is being slowed this time by the loss of people and skills during the downsizing of 1998. Nevertheless, based upon current circumstances, we're expecting world capacity to increase by four million barrels by 2002, which would exceed demand growth. And world supplies could be almost 30% higher in 2010 than today. That's not the road to a shortage. What one does not know is how bumpy it will be getting there.

-- (Mr Yergin, chairman of Cambridge Energy Research Associates, won the Pulitzer Prize for "The Prize: the Epic Quest for Oil, Money, and Power")