The two nastiest global recessions of recent decades were preceded by huge and sudden rises in the price of oil, first in 1973 and then in 1979. These twin spikes, both engineered by the Organisation of the Petroleum Exporting Countries limiting its oil shipments, are still the textbook example of an economic “shock”—a sudden change in business conditions. Abrupt increases in the oil price have prompted anxiety about stunted growth ever since. In Shock Treatment the author suggests that due to improvements in energy efficiency our dependence on oil is not what it once was. Prices in real terms have returned to levels last seen in the 1970s, but their impact is not as powerful when set against the diminished economic importance of oil.
Higher oil prices act like a tax increase on users. The result is that consumers have less money to spend on other things. Economists are suggesting that oil shocks do not hurt as much because oil is used less intensively than before, because the economy is more flexible and because central banks are better at controlling inflation.