Lower Oil Reliance Insulates World From 1970s-Style Crude Shock
IMF Blog, May 5, 2022
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Bibliographic details
- Authors: Nico Valckx
- Published: May 5, 2022
Context and headline findings
- Publication date: May 5, 2022
- Topic: Economic spillovers from the war in Ukraine and sanctions on Russia, with a focus on energy and oil-price effects.
- Key observation: Oil prices have climbed but increases have largely been contained thanks to spare production capacity in some countries and strategic petroleum reserves in others.
Oil-price movements and comparisons to the 1970s
- Brent crude rose to a seven-year high around $100 before the invasion sent it surging to more than $130.
- Historical comparison: Crude prices almost tripled between August 1973 and January 1974.
- Measurement of oil reliance: Economists track oil intensity by comparing how many barrels are needed to produce $1 million in gross domestic product.
- Relative change in oil intensity: The oil intensity measure was about 3.5 times higher than current levels when crude prices spiked in 1973–1974.
Why a 1970s-style stagflation is less likely now
- Lower oil reliance:
- The world relies less on oil today than in the 1970s, reducing the potential macroeconomic shock from oil-price spikes.
- Labor market structures:
- There is generally a lower prevalence of wage-setting mechanisms that automatically adjust worker pay based on inflation, reducing upward wage-price spirals.
- Monetary policy framework:
- More central banks are independent today, and the credibility of monetary policy has broadly strengthened since the 1970s.
Growth and inflation outlook
- IMF expectation: Global growth is expected to be close to the pre-pandemic average of 3.5 percent, even after the April World Economic Outlook lowered projections.
- Risks: Growth could slow more than forecast, and inflation could turn out higher than expected.
- Regional vulnerability: These risks may be most salient for parts of Europe, given their relatively higher reliance on Russian energy imports.
Source: IMF blog post “Lower Oil Reliance Insulates World From 1970s-Style Crude Shock,” May 5, 2022.
