Why No Oil Price Shocks?

Many of my clients have been asking me why the record-high prices of oil haven't led to the kind of deep recession we saw in the mid-1970's. There are several answers to this, and - if understanding where the economy is headed is important to you, it's worthwhile to look at each of them.1. Oil is less critical to the US and Global economies today. While offshore outsourcing seems to be here to stay, much of the pressure for globalization comes from the simple fact that the value created by offshore suppliers far exceeds the cost of transporting that value. This is clearly the case when we look at information-based products/services, such as computer software and movies, but it is also true of physical products, such as cameras and automobiles. Even commodity products like oil and steel embody a great deal more information that they did in the 1970s. This means that the fuel component of the transportation cost for shipping these goods, while rising, can be balanced by commensurate increases in productivity.2. No one is surprised by high oil prices. Not only do most CEOs have clear memories of the 1970s, but most of us also remember the oil price spike that happened around the first Gulf War. Being prepared for these cost pressures means that we know how - and hopefully when - to adapt to them.3. Inflation has been TOO low. Oil prices are a fine excuse for many companies to take much needed price increases. As we exit the "Wal-Mart Era", many of us are realizing that nothing goes straight to the bottom line like a price increase...but most of us, psychologically, are still afraid of them. Seeing other prices rising gives us comfort in raising our own prices - just a bit - and this is leading to greater profitability in, for example, parts of the trucking industry.

Note: this is a repost of an old entry from Sept. 2005, to delete unmoderated spam comments.