Oil prices and why 2022 is not the new 1974

Rising oil prices are causing widespread concerns about stagflation among investors. Yet it is important to have in mind that oil consumption is much less important to the global economy now than in the 1970s when oil price increases caused surging inflation, deep recessions and collapsing stock markets.

To see this, the graph below shows US consumption of crude oil, divided by US real GDP. It can be thought of as measuring how much crude oil is needed to generate one unit of real GDP. The index fell from 100 in 1973, the year before the devastating oil shock of 1974, to 34 in 2021. The point is clear: the US economy now uses 1/3 of the amount oil it needed in 1973 to produce one unit of output. (Similar relationships hold for other economies.) Since less oil is needed, production costs, and therefore inflation, will be less impacted by oil price increases than in the 1970s.

Chart 1. US oil consumption/GDP

Source: U.S. Energy Information Administration and FRED. Data as of 8 March 2022.

Furthermore, the increase in oil prices is still much smaller than the increase in oil prices in 1974 when they rose 168%.¹ Given an average price in 2021 of West Texas Intermediate crude oil of USD 67.99 per barrel, the annual average price in 2022 would have to rise to USD 182 per barrel for the increase to be equally large as in 1974; at the time of writing, they are fluctuating around USD 120 per barrel. While this increase is large (78%) it doesn’t come close to the increases observed in 1974. 

Chart 2. Oil prices, West Texas Intermediate

Source: FRED, data as of 8 March 2022.

There is no denying that recent oil price increases constitute a severe challenge to economic growth and inflation in the US and elsewhere in the world economy. However, modern economies require much less oil per unit of output than they did 50 years ago, and the price increases are to date much smaller than those in 1974. Thus, the risks to the economic outlook, while significant, are much smaller now than in 1974.

¹ This increase is computed using the yearly averages of the price of West Texas Intermediate crude.