Oil importers faced significant challenges on Monday as ongoing conflicts continue to impact global markets. While oil prices have surged past $100 a barrel, sparking media alarm, the fundamental issue is not the price fluctuation itself but how governments and societies respond to these economic shocks. Paul Ormerod argues that attempting to shield living standards during such periods, when the nation overall suffers, represents a critical mistake.
Historical Context of Oil Price Volatility
Like many commodities, oil has experienced substantial price swings over the decades, with profound effects on household incomes. Over the past 50 years, several major spikes have occurred. The first significant increase happened in 1973/74 when OPEC began asserting its influence. Prior to this, oil prices had remained relatively stable, averaging between $2.50 and $4 per barrel since World War II. By 1974, the average price jumped to nearly $10 per barrel.
A further surge followed in 1979/80 after the Iranian Revolution, which ousted the Shah and installed a new regime. After a period of relative calm and oversupply in the late 1980s, prices rose sharply from the early 2000s until the 2008 financial crisis, driven by booming global demand. More recently, the conflict between Russia and Ukraine triggered another spike in energy prices. Despite these fluctuations, the world economy has continued to advance over time.
Lessons from the 1973 Oil Crisis
The 1973/74 oil price increase had particularly deep consequences. For decades after World War II, the world benefited from cheap oil, averaging around $30 per barrel in today's prices. This episode marked a major shift, establishing a new regime where average prices rose to approximately $70 per barrel over the following five decades, despite ongoing volatility.
Long-Term Impacts on Energy Efficiency
This shift to higher energy prices spurred crucial long-term changes. It provided strong incentives not only to reduce energy consumption in the short term but also to gradually transition capital stock toward more energy-efficient machinery and buildings. Before 1973, the amount of energy required to produce a unit of GDP in the United States had decreased by only a few percent since World War II. Since then, it has more than halved, demonstrating significant improvements in efficiency.
Immediate Economic Disruptions and Recovery
The immediate impact of the 1973 oil shock was disruptive. In 1974 and 1975, GDP declined by just over one percent in the United States and Germany, and by two percent in the United Kingdom. However, these were not severe recessions by historical standards, and the effects were short-lived. By 1976, all three economies had recovered, with the United Kingdom barely surpassing its 1973 levels, while the United States and Germany experienced robust growth.
Inflation Responses: A Tale of Two Countries
Inflation rose sharply across affected nations, but responses varied significantly. An increase in oil prices transfers national income from consuming countries to producing ones, inevitably lowering living standards. In Germany, the labor force recognized this reality and avoided self-defeating attempts to offset the shock through higher wages. As a result, inflation remained in single digits and was under control by the late 1970s.
In contrast, the United Kingdom witnessed a different approach. The RMT, a rail union, rejected a wage offer of 27.5 percent, deeming it insufficient. This contributed to inflation soaring above 20 percent, a problem that took two decades to fully resolve. The key lesson from the 1970s oil crisis is clear: while GDP impacts were modest and temporary, the real danger lies in wage-price spirals when workers futilely try to protect living standards amid broader national decline.
Paul Ormerod, an Honorary Professor at the Alliance Business School at the University of Manchester, emphasizes that government and societal responses to oil price shocks are far more critical than the price movements themselves. Misguided policies can exacerbate economic pain, whereas adaptive strategies can foster resilience and efficiency gains.
