Allister Heath

Braced for a new oil shock? Relax, this isn’t the 1970s

The world economy can now cope with $100 a barrel oil

Those of us born in the late 1970s have a great advantage when it comes to understanding today’s oil market: we cannot remember Opec embargoes, nor the double-digit inflation and bitter recessions they triggered. So while many of our elders and betters were predicting Armageddon as the price of oil climbed inexorably over the past couple of years, we younger ones took the surge in our stride — rightly, as it turned out.

There is little doubt that the black stuff will soon cost at least $100 a barrel, while a litre of petrol routinely tops £1. But the British and global economies have changed so much over the past 40 years that they can now handle it. This is not to say it will be painless; merely that these days, other economic shocks — especially anything that affects the credit and banking systems — matter far more.

A recent modelling exercise by the International Monetary Fund to gauge the effects of a doubling in oil prices showed world growth slowing at worst by 1.4 percentage points before returning to normal after two years. Inflation would rise by a maximum of 1.5 per cent, though the spike would only last five months. All of which would be eminently bearable, and helps explain why the world economy is still doing nicely despite a 63 per cent rise in the oil price to its peak this year.

Oil can go up for two reasons: supply may be restricted — which is what happened in 1973 and 1979 — or demand can surge. The good news is that the broader and more flexible world economy of today is much better able to cope with a gradual, largely demand-driven increase in the price of oil.

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