This is easier than the 1970s oil shock
Business Standard, 27 April 2026
The question
The blockade of the Persian Gulf will likely run for a while. Let's assume that the price of oil will stabilise at $160 a barrel, roughly a doubling compared with pre-war conditions. The short-term manifestations are visible. The Indian economy faces a decline in inward remittances, a contraction in merchandise exports, and an expanded import bill for energy.
What about a more strategic view, looking into 2027 and beyond? We must identify the forces at work and trace the adjustment process. This will involve speculation, but it can be grounded in economic history and macroeconomic principles.
The 1970s shock vs the 2026 shock
The 1970s provide us with the reference point. The world experienced big crude oil price jumps in 1973 and 1979. We understand the mechanics of those shocks and their resolutions. That gives us insights into what we face today.
Metric 1970s Oil Shock (1973 -- 1980; 1976 Midpoint Data) 2026 Oil Shock Change (%) Share of global oil and gas in global Total Energy Supply (TES) ~62% ~55% -11.3% Energy required to produce $1 of global real GDP (2026 prices) 7.9 MJ 5.3 MJ -32.9% Total size of the oil shock (price multiplier) 12.0x ($2.90 to ~$35/barrel) 2.0x ($80 to $160/barrel) -83.3% Share of oil and gas in Indian Total Energy Supply (TES) ~13% ~31% +138.5% Global grams of oil equivalent (goe) per $1 of real GDP (2026 prices) 117.6 goe 69.4 goe -41.0% Indian grams of oil equivalent (goe) per $1 of real GDP (2026 prices) 64.1 goe 62.8 goe -2.0% Increased wealth transfer from importers to exporters (as % of global GDP) 3.62% (1980 peak) 1.04% (to all net exporters) -68.5% The share of oil and gas in global energy supply has declined from 62 per cent in the 1970s to 55 per cent today. The global economy is more energy efficient: moving from 7.9 megajoules per dollar of GDP to 5.3 megajoules, a gain of 33 per cent. Global oil intensity per dollar of GDP dropped from 117.6 grams to 69.4 grams, a 41 per cent reduction.
What about the Indian data? The share of oil and gas in the Indian energy mix expanded from 13 per cent in the 1970s to 31 per cent today, an increase of 139 per cent. Oil intensity in India has stagnated at about 63 grams of oil per dollar of GDP.
The magnitude of the price disruption is different. The 1970s featured a 12-fold price increase, from $2.9 to $35 a barrel. Brent is at $105. For 2026, let's assume the current environment involves a two-fold increase, from $80 to $160. Market clearing requires a price level that balances supply and demand. It is not yet established whether $160 is the equilibrium price. We hope this much price adjustment suffices to grow global supply and crimp global demand to the extent required. If the adjustment concludes near this level, this shock is milder than the 1970s episode.
The increased wealth transfer from importing economies to exporting economies is another view of the global macroeconomic disruption. In 1980, this change in the transfer equalled 3.6 per cent of world GDP. The current projection suggests an increased transfer of 1 per cent of world GDP.
Across such a series of measures, we see that things are better in the 2026 oil shock when compared with the 1970s shock.
How will the world respond?
We must turn to the institutional framework of macroeconomic policy. In the 1970s, central banks lacked coherent nominal anchors and made mistakes, generating macroeconomic instability. Modern macroeconomics was created in response to the mistakes of the global macro response to the oil shock. Inflation targeting, floating exchange rates, open capital accounts: All these were born out of the misery of the 1970s. Today, inflation targeting central banks oversee the bulk of global GDP. The major central banks will not repeat the errors of the 1970s in response to the price shock.
Energy demand exhibits low price elasticity in the short run. Over time, sustained price increases alter behavior. Households and firms tenaciously seek alternatives. The technological frontier now offers substitution possibilities that did not exist in the 1970s. As an example, fossil fuels monopolised mobility fifty years ago. Today, electric vehicles offer a viable alternative.
On the supply side, new technologies like hydraulic fracking have created a new level of supply elasticity, which did not exist in the 1970s. The transition to renewable energy is ablaze all over the world. Putin's energy blackmail in Europe induced a remarkable one percentage point annual increase in the renewables share of total energy supply in Europe. The 2026 price shock is fueling renewables worldwide. In the 1970s, there was no such thing.
Follow the money
A higher oil price operates as a consumption tax. Income shifts from importing economies like India to exporting economies. The subsequent deployment of this income dictates global demand patterns. How does that money find its way back into global demand? The mechanics of petrodollar recycling will differ from the 1970s experience.
The frozen Persian Gulf restricts export volumes for Gulf Cooperation Council (GCC) countries, creating revenue shortfalls there. Establishing alternative transit infrastructure, such as pipelines to the Red Sea, is a strategic necessity for them. An important scenario is one where sovereign wealth is deployed to eliminate the Strait of Hormuz bottleneck by building new infrastructure. This requires drawing down on wealth through asset sales in global financial markets, and bond issuance.
In this scenario, the Persian Gulf region will have capital expenditure for massive construction and engineering projects, expanding to perhaps $150 billion annually. Simultaneously, the geopolitical environment dictates investments in military capability. Procuring new defence systems to protect against drone and missile attacks will require approximately $100 billion annually. We may then envision this combination of engineering and defence procurement as a new pathway for demand of $250 billion a year into the global economy from the GCC.
In the 1970s, the petrodollar recycling process was dominated by financial flows. The global financial system was not ready to process the new flows which were 3.6% of world GDP. At the time, many countries utilised capital controls, exchange rates were inflexible, and there was no inflation targeting. Today, petrodollar recycling will be a combination of these engineering and defence purchases, alongside financial flows into a better global financial system. This promises a better environment for global macro.
Implications for India
A lot of the projects in West Asia will be done by global firms, using Indian workers. Remittance flows from Indian workers will do well.
Renewables, drones and missiles, oil and gas engineering: these three things are important in export markets. The domestic environment is relatively subdued. Indian firms will do well by trying to obtain revenues from the coming engineering boom in the West Asia, and from the global boom in renewables and defence. If the regime in Iran or Russia normalises, there would be reconstruction business there also. To the extent that domestic policy makers improve the local policy environment for renewables and for cutting edge military exports, this will help.
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