Bank of America (NYSE:BAC) research indicates the world today consumes only about one-third of the oil required to generate the same level of gross domestic product as in the early 1970s. The bank's analysis highlights a substantial fall in economy-wide oil intensity over the past decades.
Quantifying the effects, Bank of America estimates that a 10% increase in oil prices would now add roughly 25 basis points to inflation in the United States. By comparison, the same-sized oil shock in the early 1970s would have increased US inflation by about 90 basis points. The bank also reports a much smaller growth hit today - roughly 5 basis points - versus more than 70 basis points in that earlier period.
Bank of America attributes the reduced sensitivity in the United States to two main developments. First, lower oil dependence across economic activity has diminished the direct pass-through from crude prices to consumer prices and output. Second, the shale production boom since the 2010s has reshaped the US energy position, turning the country into a net energy exporter and providing additional insulation from global oil-price shocks.
In contrast, the Euro area remains more exposed. The bank's findings show Europe is about twice as sensitive to oil-price movements as the United States. A 10% oil-price shock would add roughly 40 basis points to inflation in the Euro area, with a growth impact that exceeds 10 basis points. Bank of America points to the larger share of energy in European consumption baskets and the region's status as a net oil importer as key reasons for the higher sensitivity.
The bank's recent forecasting adjustments reflect the effect of a substantial rise in oil prices. Bank of America says its revisions incorporate approximately a 40% increase in oil prices. As a result of that move, the bank lowered its US growth projections by about 30 basis points and raised its US inflation outlook by 80 basis points. For the Euro area, the bank marked down growth by about 60 basis points while increasing inflation projections by 160 basis points.
These estimates underscore how changes in the structure of energy use and domestic production can alter the macroeconomic transmission of commodity shocks. They also highlight a divergence between the United States and Europe in terms of vulnerability to oil-price swings, with implications for policymakers and markets monitoring inflation and growth risks.