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Investment Commentary

Not Your Grandparents' Oil Shock

By Kyle Tripp | Johnson Financial Group • March 23, 2022

3 minute read time

Many people are feeling shocked by the recent increase in oil prices. However, the oil shock of today should not be as impactful in the United States as it was in times like the 1970s. Our economy is more resilient because U.S. consumers now spend less of their budget on energy, and we produce more energy domestically.

As a brief reminder, we have been here before. In the 1970s, the oil price shock was generated by a war in the Middle East, the oil embargo on the United States by OPEC, and a policy decision by President Nixon to ration American oil supplies. The result was very high inflation and a recession throughout the U.S. and most of the developed world.

What’s different now?

In 1975, the average U.S. consumer spent 7.5% of disposable personal income (DPI) on energy. In 1990, consumers spent 5.5% of DPI on energy, while today we spend about 3.5% DPI on energy, according to a recent Piper Sandler report. While it’s unavoidably true that people with a lower income do spend a greater percentage of their income on energy—and are therefore disproportionately impacted—the lower average figure indicates the overall economy is far more insulated than previous periods.

The other large difference today is the amount of energy domestically generated in the United States. The U.S. is now a net energy exporter. This of course was not the case until very recently. In 1970, the U.S. was a net importer of energy in the amount of 12.1 quadrillion British Thermal Units (BTU), according to government figures at the time. Today, the U.S. exports net 3.46 quadrillion BTUs of energy.

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Positive offsets

In the past, oil shocks acted like a tax on the whole economy. Now, at least up to a point, the U.S. economy sees some benefit from higher oil prices. These include increased agriculture and commodity exports, more revenues for U.S. energy producers, and temporary decreases in consumer saving rates to make up for the change in energy prices.

Benefits from these positive offsets do fade as the price of energy rises to a higher price point because consumers begin to change their spending behaviors—forgoing other purchases in anticipation of possible future price increases.

We’ve seen multiple estimates that the price of oil becomes a drag on the United States economy at about $130 a barrel. The European economy in contrast, is in a very different situation. Europe is very reliant on external sources of energy, and this impacts the rest of the world in a more pronounced way. Europe does not have the positive offsets the United States enjoys.

Pain at the pump but overall resiliency

There are many things to be concerned about in the current world environment, and the energy situation is certainly one of them. But although we may feel pain at the pump—as our parents or grandparents did in the 1970s—we can take some comfort that the U.S. economy is more resilient than it was decades ago.

This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank, Johnson Wealth Inc. and Johnson Insurance Services LLC. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE