How the oil push has been less traumatic

T.He is symptomatic Bad for the world economy. When oil prices rise, growth usually goes in the opposite direction. Sometimes price shocks start with a political earthquake, such as the 1956 Suez Crisis. Sometimes oil producers deliberately create shocks, e.g. OPEC The 1973 embargo. And sometimes the culprit is rising demand, such as in 2008 when oil prices reached record highs.

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So it would be very surprising if the current rise in oil prices, which doubled in three months as a result of Russia’s aggression in Ukraine – predicted a sharp slowdown in growth. Pickett, an asset manager, counts six episodes since 1970 where real oil prices have risen more than 50% from their previous trend; Each before a recession. Oil prices have already crossed this 50% threshold by the end of February and have only risen since then.

Yet, the easily observed relationship between oil and the economy is not an iron law. There have been times when prices of crude products have risen and yet recessions have been avoided, including the peak of the global product boom in 2011. The type of push is just as important as the economic context. Moreover, over time most of the world’s oil markets seem to have become better insulated. The old depressing patterns may not completely repeat themselves.

Consider the mechanics by which rising oil prices hurt. An important component of energy production, so a sharp decline in its supply or a rise in prices can drag out the output. It can also hurt demand: if people spend more of their income on oil, they have less left over for other things. Add to this the possibility that central banks may aggressively tighten monetary policy when high oil prices push up inflation, as the Federal Reserve has pursued. OPEC The 1973 crisis and the 1979 Iranian revolution.

Yet the push of the two oils is not one. An important variable is whether the shock comes from the supply or demand side of the economy. If there is a sudden shortage of supplies, such as during a ban, it acts as a new tax on production and consumption. However, due to strong demand, rising oil prices reflect economic vitality. Lutz Killian, an economist at the Fed branch in Dallas, points out that the strength of the massive demand could outweigh the negative effects of higher oil prices for some time to come. A pure supply shock, by contrast, is more harmful. They both deal with their confidence as they choose to embark on their play activities. The fourfold increase in crude prices from the spring of 2020 to the beginning of 2022 reflects the roar back from its epidemic-induced recession. The only recent upsurge is undoubtedly a supply shock, due to the Ukraine war and the associated sanctions.

Three changes in the structure of the world economy could reduce the impact of inflation. Most obviously the role of oil in the growth cycle is not the same as before. In 1973 the world used about one barrel of oil to produce $ 1,000-worth of oil GDP (In inflation-compatible terms). According to a report last year from Columbia University’s Center for Global Energy Policy, it fell to 0.43 barrels by 2019, with the intensity of growth declining year-on-year in an “almost completely linear fashion.” Part of an explanation of the transition from industry to service to economic output. The world has become more efficient in using oil. For example, cars travel twice as much per gallon of gasoline as they did in the 1970s.

A related change is the way governments respond to oil shocks. James Hamilton of the University of California, San Diego, observed that in the 1970s, American officials exacerbated economic deviations with petrol price controls, leading to shortages. Since 1981, they have moved away from such controls, which have made crude oil prices more volatile but smooth market adjustments. Some changes in behavior have made it easier thanks to the epidemic: if airfare goes up, why would you fly to that business meeting when you can log in to Zoom instead?

Central bankers may also be less tempted to raise interest rates simply because of rising energy prices, which reduces the risk of a recession. Whether the pass-through from the oil spill to core inflation is essentially zero is debatable, as Todd Clark and Stephen Terry argued in a Fed study, or in a smaller one, as Christina Confletti and Matteo Luciani argued in another Fed paper. . However, experts agree that the pass-through has weakened, in part due to a decrease in the intensity of the growth force. Even before the war in Ukraine, the Fed will raise interest rates several times this year to keep inflation in check. The bottom line is that, given the market value, investors do not believe that the push by oil will lead the Fed to a much more aggressive move than previously expected.

Shelley’s partner looked good

One final difference with the oil spill of the past is the significant evolution of America’s position in the global crude industry. In the first decade of the 2000s, the United States imported more than 10 million barrels of oil per day in net terms. With the shale revolution, American oil production has grown in such a way that it now meets most of its energy needs from its domestic production. In 2020, America became a net exporter for the first time since at least 1949.

One implication is that the push for oil is now less volatile for the American economy as a whole. Consumers may dislike raising the price of crude products but oil producers enjoy it. A key question in the coming months will be how much drilling they will extend. This will help offset the economic losses from soft consumer spending. And for the rest of the world, a resilient American economy will provide a useful ballast amid all the turmoil. The I We need to think not only about oil but also about the acute shortage of natural gas. Crude oil prices could still be much higher if the United States and Britain join forces to ban Russian imports. But at the current price of oil, the world economy, with luck, could withstand the shock. 3

Read more from Free Exchange, our column on economics:
Vladimir Putin’s stronghold Russia is crumbling (March 5)
How to Avoid Deadly Responses to Globalization (February 26)
A new history of prohibition contains unsettling lessons for today (February 19)

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This article appeared in the section on Finance and Economics of the Print Edition under the title “Shock Absorber”.

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