FINANCE AND ECONOMICS Fuelling inflation? Ec. Correspondent
ANYBODY who remembers the oil-price shocks of 1973-74, 1979-80 and 1990 should now be suffering sleepless nights. On all three occasions crude oil prices tripled, inflation soared and the world economy went into recession. Over the past year, crude oil prices have, for a fourth time, risen more than threefold. Yet almost everybody seems to be sleeping soundly; nobody is predicting a recession. Perhaps they should wake up. There are indeed good reasons to think that the economic consequences of the jump in oil prices will be less severe now than they were in the 1970s. First, the surge in oil prices comes straight after a sharp collapse: at the start of 1999, prices were at their lowest in real terms - i.e., adjusted for inflation - since 1972. Even after their recent rise, real oil prices are barely half their level in 1981. A second point is that energy conservation (thanks to higher taxes), a shift to other fuels and a decline in heavy industries have all made rich economies much less dependent on oil than they were. And yes, software firms guzzle less energy than car makers. Since the early 1970s, the amount of oil consumed per real dollar of output has fallen by almost half in rich countries. A third difference, as Philip Suttle, an economist at J.P. Morgan notes, is that each of the previous three oil-price hikes were associated with wars or revolutions, which created additional uncertainty. This time oil supply is being withheld voluntarily, so the adverse impact on business and consumer confidence may be smaller. Fourthly, previous oil shocks took place when rich economies were overheating and inflation was already rising; higher prices quickly fed through into wages. From the Economist
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