Economics was created by Adam Smith, Thomas Malthus, David Ricardo, Stanley Jevons, Alfred Marshall, and Leon Walras. All of whom worked before our modern society was built on oil; and before oil became the foundation for the modern world.
Oil and gas are the most important sources of energy for all transportation, most power supplies. Oil/gas energy is the basis for steel production and cement; the nitrogen for most agriculture comes from ammonia which comes from oil and gas and is also the basis for nearly all plastics.
It is easy to teach economics and to get a PhD in the field without ever noticing this oil/gas foundation for the economic world.
Of course we use coal, hydro and a little solar and wind power. But it is a small proportion of our modern energy.
Our first opportunity to appreciate the oil/gas foundation of our economy didn’t come until 1973, too late to rebuild an entire field of economics.
In October 1973 OPEC implemented an oil embargo on the United States in retaliation for President Nixon’s $2.2 billion in aid to Israel to replace its military equipment lost in the Yom Kippur War. The embargo was only 25% of Saudi oil to the U.S. but it raised oil prices from $3 a barrel to $12. Gas prices at the retail pump went from $0.38 to $0.55.
That began a ten year inflationary period. In 1979 oil prices again rose largely due to the revolution in Iran and the start of the Iran-Iraq War. Oil went from $20 a barrel to $40 a barrel.
The inflation as measured by the Consumer Price Index, went from 3.4% before the oil crisis to 12.3% in 1974 and remained high at 13% in 1979 with a low of 7% in between in 1976. The U.S. had a CPI with an inflationary average of 9.3% until it finally dropped to 3.8% in 1982.
We have inflation again. Rising from a CPI of 1.4% in 2020 until the incoming President Biden banned fracking on public land in January 2021, oil doubled in price and the CPI went to 7.0% for that year.
Today as I write the CPI is over 8% and I expect it to stay high and likely rise. Inflation is now global as every country has its currency tied directly or indirectly to the U.S. dollar.
Economists still don’t see the connection between the price of oil and gas and inflation. The lesson of the 1970s comes too late for economic theory.
Oil/gas prices are the basic cost of all transportation, most power supplies; it is the basis for steel production and cement; the nitrogen for most agriculture and most plastics come from oil/gas as I said in the second paragraph above. Those base prices slowly work their way throughout the economy around the world and ratchet up the prices of nearly everything including wages. Most prices and especially wages and rents are sticky and only ratchet up for many years.
That is a lesson that needs to be incorporated into economics.