Falling Oil Dependence Insulates the World From the Oil Shock of the 1970s – IMF Blog
By Nico Valckx
the war in ukraine and the sanctions against Russia have significant economic repercussions, particularly for energy.
Oil prices rose, but the increases were largely contained thanks to spare production capacity in some countries and strategic oil reserves in others.
Brent crude, the world’s oil benchmark, hit a seven-year high around $100 before the invasion sent it soaring above $130. It has since pared its gains amid pandemic shutdowns in China, the biggest oil importer, which could weigh on economic growth there.
For some, rising oil prices
Memories of the high inflation and slow growth that followed, known as stagflation, fueled worries about a possible repeat. But above all, times have changed.
As the Chart of the week shows, the world is less dependent on oil, which mitigates any potential shock. Economists track oil intensity by comparing the number of barrels needed to produce $1 million of gross domestic product, and that metric was about 3.5 times higher than current levels when crude prices nearly tripled between August 1973 and January 1974.
Another factor is today’s generally lower prevalence of wage-setting mechanisms that automatically adjust workers’ compensation in line with inflation. This reduces upward pressure on prices.
Central banks, too, have changed since the 1970s. More countries are now independent, and the credibility of monetary policy has greatly increased in the decades since.
We expect global growth to be close to the pre-pandemic average of 3.5%, even after our April World Economic Outlook lowered the projections, but it could still slow more than expected, and inflation could turn out to be higher than expected. This may be most striking for parts of Europe, given their relatively higher dependence on Russian energy imports.