Blog
No longer over a barrel?
11th May 2008
David Smith turns his attention to oil prices in today’s Sunday Times and asks why the spiraling cost of crude has not hit global economic growth and inflation as much as in past oil shocks. Most of the recessions and major slowdowns in the global economy have been pre-dated by spikes in international commodity prices. Has oil now lost the power to shock?
David quotes a new report from the National Institute of Economic and Social Research which mentions the long term decline in oil dependency for the UK economy and the effects of a flexible labour market on wage bargaining power. There are two excellent evaluation points for any essay on oil in the exams this summer.
“Ray Barrell, an economist with the institute, said the big change is that economies are less directly sensitive to oil prices than they used to be. The “energy intensity” of growth – the amount of oil, coal and gas needed to produce an increase in gross domestic product – has halved since the 1970s, reflecting greater energy efficiency and the shift away from heavy manufacturing. Labour markets have also become more flexible, said Barrell, so workers accept temporary reductions in real wages when energy prices rise, while in the past they would have demanded compensation. The wage-price spiral used to mean expensive oil led to inflation, unemployment or both. Central banks now are under less pressure to act to head off the “second round” inflationary effects of dearer oil.”
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.