Let’s start with the shocking comparison.
In the first oil shock (1973 & 1979) prices were set by an oil cartel called OPEC. OPEC set prices that its members more or less adhered to. At first, when prices changed there was virtual certainty that that was the new price. That part is different from the way the oil market works today. OPEC 'matters' but is no longer its sole master. Market forces themselves produce prices and prices fluctuate. Even so what OPEC did in ratcheting prices up in teh 1970s in what then became a severe recession and an open-door policy for inflation is still LESS than the price episode we are currently in the middle of. Yes, in some way this prices shock is larger.
In the early 1970s the real oil prices went from about 7.9 dollars per barrel to a peak of 48.4 dollars per barrel. For these statistics I look at WTI prices for oil scaled by the non-energy CPI. In this episode the real oil price has gone from a low of $7.7/barrel in 1998 to a high of $56.91/barrel. Thus real oil prices rose by 6.1 times in the 1970s over two separate price resets but have risen by more in this cycle, rising by 7.7 times, and peaking in 2008. The 1970s spike took about seven years while in this cycle the swing from low to high took about eight years. In this cycle about four years after the peak the price is lower by 30%. Four years after the peak in the late 1970s the real prices was lower by 40%.
But the pain from this shock has been not quite as great as it was in the 1970s...Energy spending as a percentage of personal income was around 6% in the early 1970s. After the oil shock the share of energy went up to 9%. Compare that to this period when the share of energy in consumer incomes was about 4% prior to the price shock, rose briefly to 7%, dropped back to 5% and is currently around 6%. The impact on the share of income in both cases is up by 50% in terms of the rise of the share of energy as percent of consumer spending. But the overall importance in the level of spending of energy is greatly reduced in the recent period. So oil does not create the same havoc with consumer budgets when prices rise. And the change in the impact on spending was greater in the 1970s as the energy share rose by 3% points compared to 2% points this time. That is another important reason why the shock which by some measures as larger than in the 1970s has not been anywhere near as painful.
The shock is still reverberating. The pain is still in play. Unlike the 1970s shock this one was not the first shock we had seen. We were not totally unprepared; our energy efficiency is better. We had seen higher then lower oil prices since the spike in the 1970s. We now know oil prices are unpredictable. We now know the risk in oil. It has geopolitics, domestic politics, corporate politics and maybe a touch of economics hidden there some where. Oil prices do threaten the economy but not through $4/gallon gasoiline. The economy is coping and will cope with that, it's all the other stuff. And that my friend is still in play. The Fed still needs to show us that in the wake of the oil spike and its own balance sheet blowup it will not repeate the monetary mistake of the 1970s. That is one of the most devious aspects of oil, it entices policy makers to play with it and that is where the real danger lies. Watch that.