War brings echoes of the 1970s oil shock

War brings echoes of the 1970s oil shock

It is only a minor exaggeration to say that the 1973 oil shock created the modern global economy. That year the Arab oil producing countries stopped exports to many western countries as punishment for providing aid to Israel during the Yom Kippur war. The embargo helped birth a new energy economy, aiming to reduce dependence on foreign oil. Its effects on inflation, meanwhile, brought the Keynesian era, where central banks sought full employment, to an end. Eventually, the effects would usher in the world of inflation targeting independent central banks.

Almost half a century on, the Russian war in Ukraine and the sanctions imposed in retaliation are raising the risk of a new oil shock. While there is, as yet, no embargo of similar scale to the 1970s on Russian oil — the US, which announced an end to imports this week, and the UK, which plans to more gradually phase them out, buy little compared to other countries — global prices have risen over the past couple of years by a similar proportion. The cost of a barrel quadrupled during the 1973-74 embargo. Today, prices have risen at an equivalent pace since their, admittedly pandemic-induced, low in 2020.

But oil is