It was sometime last spring that the dreaded words “oil shock” first began to appear regularly in commentary on the United States economy. As the price of oil rose past forty dollars a barrel, many economists and Wall Street analysts predicted that higher petroleum prices would slow the economy and perhaps even throw it into recession. They recalled the reverberations of previous oil shocks (in 1973, following the Arab oil embargo; in 1979 and 1980, after the Iranian revolution and the Iran-Iraq war; and in 1990, after Iraq’s invasion of Kuwait) and suggested that we’d soon be feeling them again. Since then, the price of oil has gone well above fifty dollars a barrel, and the oil-price anxiety is as acute as ever. Last week’s news that inflation had jumped in March had people talking about stagflation and Gerald Ford. Before we know it, it will be 1974 all over again.

Or not. It may be hard to be blasé when you’re paying $2.50 a gallon at the pump, or if you’re the chairman of a major airline, but there is surprisingly little evidence that high oil prices have anywhere close to the effect on our economy that we seem to believe they do. They matter, of course, but, of all the reasons to be concerned about America’s economic standing, oil, believe it or not, belongs pretty far down on the list.

Why such a lowly rank for the economy’s so-called lifeblood? Haven’t most postwar recessions been accompanied by rising oil prices? Indeed they have. But correlation is not causation, and all oil spikes are not created equal. The fact that the geopolitical oil crises of the seventies hurt the economy doesn’t say much about what high prices will do to us now, in the absence of a crisis.

When you look closely, it is hard to know what effect, exactly, oil prices have on the economy. For instance, higher oil prices are often assumed to be inflationary—that is, they raise prices. But Mark Hooker, a former economist at the Federal Reserve, has shown that since 1980 higher oil prices have had essentially no effect on over-all inflation. Higher oil prices are also said to create uncertainty, which causes consumers and businesses to hold off on major purchases and investments, thereby slowing down the economy. But there’s little evidence of this. Robert Barsky and Lutz Kilian, economists at the University of Michigan, have found that in the past three decades higher oil prices have had no consistent effect on whether or not consumers kept buying cars or expensive household items like washing machines. (The oil spike of 1979 led to less car buying. The oil spike of 1980 led to more. Or maybe it all had to do with Lee Iacocca.) Oil shocks have also had no predictable impact on corporations’ decisions about whether to invest in equipment or new plants.

Higher prices do function as a kind of tax increase that raises the cost of doing business (with the proceeds effectively going to foreign exporters). But the size of this tax is too small to create a meaningful slowdown on its own. And, while there’s some evidence that higher energy costs increase unemployment when oil-dependent industries lay people off, the number of jobs lost is too small to disrupt the economy as a whole.

More recently, steep rises in the price of oil have accompanied healthy economic growth—in 1999-2000 and in the past few years, for example. Declines in oil prices have not necessarily sparked economic booms, either. And recessions haven’t always been triggered by high oil prices. The downturns of 1973 and 1990 started even before the oil shocks occurred, which suggests that oil wasn’t solely to blame (though it undoubtedly made things worse). In the past thirty-five years, there has not been a single case in which high oil prices have thrown an otherwise propulsive economy into reverse.

The point is not that oil spikes are irrelevant but that they don’t have any kind of predictable or consistent impact. The past isn’t much of a guide; the American economy has changed dramatically since the seventies and is far less dependent on oil than it used to be. Roughly speaking, the United States uses about half as much energy per dollar of G.D.P. than it did thirty years ago, and even though American oil production has dwindled, oil imports as a percentage of the economy are still very small (about 1.5 per cent). This is both because of more efficient energy use—though let’s not start handing out any medals here—and because of a decline in manufacturing. As for consumers, energy costs still make up less than five per cent of the average household budget, while a barrel of oil costs about sixty per cent of what it did twenty-five years ago.

The Federal Reserve is another factor; it’s more sophisticated than it used to be in its management of interest rates and its understanding of oil prices. In the seventies, poor monetary policy helped turn an oil crisis into an economic crisis. There’s little chance of that happening today. Also, the current oil spike has been caused, for the most part, not by war or revolution but by a gradual increase in demand, primarily from China and the United States, whereas in the past every oil shock that accompanied a major slowdown was the product of political or military upheaval—a limit on supply.

Historical analogies are hard to resist, especially in a time of difficulty, because they help us identify patterns. That’s why Wall Street is rife with rules of thumb. Still, they can also confuse and obfuscate. Sometimes the people who insist that “things are different this time”—for example, during the dot-com boom of the late nineties—are deluding themselves. But sometimes things really are different. It can’t be 1974 forever.

Originally posted in the New Yorker, 2005-04-25