Oil Costs: Why This Is Not the 1970s

With recent events in the Middle East, we have seen a steep increase in the cost of a barrel of oil. We entered the year with WTI, or West Texas Intermediate, hovering around $60 per barrel. At the time of this writing, WTI is trading around $98 per barrel. That increase, and that level, while concerning, is still well below the $117 price we saw as recently as the summer of 2022.

For those of us with some gray hair, we remember the oil shock of the 1970s. An oil embargo put in place by OPEC caused energy prices in the US to skyrocket and also led to actual shortages. We saw lines at gas stations and even rationing. The rise in costs became embedded in inflation and led to a period of stagflation, which is an economic slowdown coupled with rising inflation.

Today’s environment is meaningfully different. There are several factors that lead us to that conclusion. The most important turning point came in 2011 with the rise of fracking. Fracking changed the global energy landscape. As recently as the mid-2000s, the US imported around 12 million barrels of oil per day. Today, on average, the US exports around 6 million barrels of refined product and 4 million barrels of crude oil per day.

Service-based economy

Another factor is that the US economy is far less sensitive to the price of oil than it was 50 years ago. We have increasingly become a service-based economy. In its current structure, the economy requires far less oil consumption per unit of GDP output.

To be sure, if prices continue to rise significantly from here and remain elevated for an extended period of time, it will have negative effects on the economy. We will almost certainly see continued upward pressure on prices at the pump. Travel and transportation costs would rise as well. In that environment, we would expect to see some demand destruction and a broader economic slowdown. It is highly unlikely, however, that the US would experience anything like the energy shortages or spiraling inflation of the 1970s.

Keep a long-term perspective

As always, periods like this can feel unsettling in real time, especially when headlines are dominated by conflict and rising prices. Still, it is important to keep a long-term perspective and remember that not every oil spike leads to the kind of economic environment we experienced decades ago. The structure of the US economy is different today, and that matters. CPC will continue to monitor these developments closely, communicate clearly, and remain the trusted partner our clients can rely on through changing market environments.