Compared to the two oil shocks of the 1970s, the new shock linked to the blockade of the Strait of Hormuz, through which about one-fifth of the world's oil supply passes, could be even more severe. Yet its economic consequences could be less significant. The global economy is no longer what it was in the 1970s. At that time, economies were much more dependent on oil than they are today. In 1973, the Yom Kippur War broke out. Arab countries decided on an oil embargo against the United States and its allies. The result: the price of oil has almost quadrupled, the global economy is plunging into stagflation, and inflation and unemployment are exploding. The shock is global. The West is discovering, in a brutal way, that its dependence on oil is total. In France, Valéry Giscard d'Estaing reintroduced daylight saving time by decree in 1975, in the name of energy conservation: an extra hour of daylight means less electricity consumption. At the time, Giscard campaigned on the idea that in France, "we may not have oil, but we have ideas." Carter and Oil Dependence A little later, in 1977, US President Jimmy Carter anticipated future oil shocks and addressed the nation: Less than two years after this speech, the Iranian Revolution broke out, triggering the second oil shock. These two shocks each caused a loss of approximately 4 to 5% of global oil production. Today, the blockade of the Strait of Hormuz is paralyzing the transit of about one-fifth of global oil supplies, making the potential shock very severe, perhaps more so than the previous two. A US Economy Less Dependent on Oil Prices But the macroeconomic impact could be more limited. As Nobel laureate in economics Paul Krugman points out, the US economy is now about four times larger than it was in 1973, while consuming roughly the same amount of oil. Why? Because cars are more fuel-efficient, industry is more efficient, and much less oil is used for heating. Another factor Paul Krugman raises is that inflationary spirals are less pronounced and less automatic than in the 1970s. At that time, unions were very powerful in the United States and had secured automatic wage indexation for many workers based on price increases. Gasoline costs more, wages also rise, which drives prices up: this is the famous "wage-price spiral." But today, most wages are no longer indexed to inflation, which limits this spiral.
Central Banks: Macroeconomic “Bumpers”
Another fundamental difference: central banks now play a role as “macroeconomic bumpers” that they did not have in the 1970s. They are much more responsive and, for the most part, obsessed with price stability. In the 1970s, they reacted more slowly: they let inflation rise, then abruptly stifled growth with massive interest rate hikes. Ultimately, monetary policy amplified recessions linked to oil shocks, rather than mitigating them.
Since the 1990s and 2000s, central banks have learned the lessons of this period and intervene much more quickly. In 2020, in response to Covid, the Fed and the ECB acted as a true firewall: zero interest rates, massive asset purchases, liquidity lines, and targeted credit programs. The idea is no longer to "let the market run its course," but to ensure that a shock (health, financial, or oil-related) does not turn into a systemic financial crisis. Three scenarios for Hormuz
The macroeconomic impact will, of course, depend on the duration of the conflict. At this stage, the signs are not reassuring. For oil traffic to resume in the Strait of Hormuz, Nobel laureate Paul Krugman lists three scenarios:
- The United States ends its military campaign.
- Regime change occurs in Iran.
- The Iranian army is sufficiently weakened to no longer threaten shipping.
For now, notes Paul Krugman, none of these scenarios seems imminent, which suggests a protracted conflict.
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