Oil and “follow the money”

Weekly Updates

There was a critical reason the 1973 oil price shock was negative for the global economy. Simplistically, consumers in countries that liked to consume (like the United States) gave money to oil producers. In 1973, oil producers did not spend—they saved. From a global perspective, the events of 1973 meant the world spent less and saved more, slowing growth.
“Follow the money” is always a sensible approach. In the short term, consumers are likely to find money to pay for oil by cutting saving. This cannot carry on forever if the oil price is higher for longer. In that case, either less oil is consumed or other forms of consumption must be cut.
Today, population growth, changed expectations, and military spending mean oil producers are more likely to spend oil revenues. The sort of spending is different—not US consumers spending in Walmart, but Gulf countries shopping for air defense. However, at a macro level, this is less negative for growth than in 1973.
Oil companies receiving additional oil revenue may benefit shareholders. Who owns the shares will matter. Lower-income households (which tend to consume) might end up handing over money at the petrol pump that eventually finances dividends for higher-income households (with a lower propensity to consume).