We've all seen the Hormuz-oil price stuff in the news, and particularly in the market prices (#1456098, #1457027). And even if you haven't -- bless your soul and mental fortitude #1383936 -- you might have noticed the price for gasoline, so conveniently and availably scattered across the highway, being markedly higher.

Everyone old enough to think critically about the economy or economics has been brought up with the oil crises of the 1970s in mind; we've all heard about stagnation and how bad it can suddenly get when oil prices shoot up (always for some geopolitical shock to shipping lanes or oil production) and central banks accommodate the shock (by loosening monetary policy, etc).

But is it still the case?But is it still the case?

Back then, the U.S. was a major importer of oil -- meaning that changes in oil prices hit directly on its terms of trade and consumers felt the effects directly.

Today? Not so much.
The U.S. is today a net exporter of oil (and certainly LNG), so in the aggregate, higher energy prices means an income-effect and terms-of-trade boom to America.

When energy prices rise, every country has consumers who lose and producers who gain. High prices or low prices aren’t blanket good or bad. The national effect depends on which side of the trade you’re on.

when the price of oil rises, consumers pay more and producers earn more. And consumers here means anyone using oil as an input, not just people at the gas pump. In a closed economy, when a Saudi consumer pays more for gasoline to a Saudi producer, money changes hands inside Saudi Arabia. Nothing enters or leaves the country. It’s a transfer, not a national gain or loss. The same is true inside the U.S., inside Japan, inside anywhere. Domestic transactions wash out in the aggregate.

For a net importer, an oil shock shifts AS left unambiguously. Energy is a production cost, and the price increase is a pure drain. That’s the story I told [in Econ101 class, teaching oil crisis]. But AD shifts left too, because income flows to foreign producers. You get the supply dilemma plus a demand recession on top. The AD shift makes the quantity drop worse but actually tempers the inflation part.

For a net exporter, we still have the AS shock left. Energy is still a cost of production, so there is cost-push pressure. But the export windfall raises income, which works the other way. You have a bigger inflation spike but less of an output fall.

As a net importer (Japan today, or US in the 1970s) you get the double-wammy of higher prices and lower incomes -> stagflation. As a net exporter, you get the AD curve compensating for the AS curve, with output roughly constant (give or take) but prices pushing upward. If anything, then, you get more "inflation" from oil shocks now than back then... but scant little of the (aggregate) wealth-harming effects of a recession.

Europe after the Russian invasion in 2022 is more classic stagflation, both curves shifting the wrong way. The U.S. in 2022 wasn’t really affected.

....and now the (inflation-targeting) central bank is posed to make the same goddamn mistake it has repeatedly made in response to supply shocks:

PCE includes gasoline and heating oil directly, so it will look alarming. But the GDP deflator, which tracks domestic production prices, tells a calmer story. If the Fed reacts to the PCE number and tightens aggressively, it risks creating the recession that the oil shock itself would not have caused.

"The big thing is that producers and consumers are not the same people.""The big thing is that producers and consumers are not the same people."

Capital can escape. Workers can’t. They live here. They work here. So labor eats it.

We can work out the number. The real wage decline equals the ratio of energy’s cost share to labor’s cost share, multiplied by the real increase in energy prices.
Today, the energy cost share in the U.S. is about 6 percent. The labor share is about 58 percent. The ratio is roughly one-tenth. Oil is up about 70 percent, but natural gas — half of U.S. energy consumption — has barely moved, so the composite energy price is up maybe 35 percent. Have I mentioned this is back-of-the-envelope? One-tenth times 35 percent. We’re talking a real wage hit of 3 to 4 percent.

and the effect is very, very widespread and ambiguous:

nobody is only a worker. You might take a 3 percent real wage cut and also hold Exxon shares that are up 40 percent. People own mineral rights, have 401(k)s heavy in energy, heat their homes with cheap natural gas. How much the shock hurts you personally depends on your whole mix of income, not just the paycheck.

Export industries, and their workers, probably see overtime and wage increases and hiring sprees.

The gut reaction to $118 oil is that it’s bad. The price theory reaction is instead to work through the models, bad for whom, through what channel, and are you sure? The answers turn out to be more interesting than the panic.