How large is Europe's energy shock?
Comparisons with the 1970s are appropriate - the shock may even be larger!
The acceleration in gas prices in Europe is comparable to, and potentially larger than, the oil shocks of the 1970s;
It is natural that policymakers are framing today’s policy challenge in terms of the experience then.
The magnitude of the energy shock facing Europe is difficult to contextualize. But at every press conference following the Monetary Policy Report, Deputy Governor of the Bank of England, Ben Broadbent, attempts to do so.
In February, the energy shock represented “the steepest rise in energy costs for households as a share of income in a single year… that we’ve ever seen, probably including the seventies.”
By May, Broadbent continued “I’m going to, sort of, bang on about the scale of these effects… I said, in February, it was getting close to twice what we saw in any single year in the 1970s.”
Then in August, “over the worst two-year period of the 1970s… the share of household income rose by, I think, 0.7 percentage points. So, it absorbed that much of real income growth over the period. Between the first quarters of 2021 and 2023, we think that number will be pretty much 3.5 percentage points, so it’s around five times as big.”
Another way to make this point is to line up the USD price of crude oil (per barrel) from 1971 until 1985 and overlay the cost of Europe’s natural gas (per million BTUs) since Dec. 2018 until last month—as we do in the chart below.