EFG International : 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.