Where have all the oil shocks gone?

(The following is borrowed from Gregory Mankiw, former economic adviser to President Bush)

Oil prices are near record highs, which raises a fascinating question. In recent years, the U.S. and world economies have typically shrugged off oil price increases. By contrast, oil price increases are a major part of the conventional story of the economic turmoil of the 1970s. Why the difference?

We economists do not have a complete answer, but we have some clues. One important clue is on graph above.

The economy is far more energy-efficient today than it was in the past, in part because economic activity is based more on services and less on manufacturing. As a result, energy prices matter less today.

In their research on the topic, Blanchard and Gali also give credit to more flexible labor markets, better monetary policy, and a bit of luck.

Another hypothesis: The macroeconomic effect of high energy prices may depend on whether the high prices are the result of reduced supply or increased demand. Perhaps in the 1970s high oil prices were largely the result of supply restrictions, whereas in recent years high oil prices are driven more by increased demand from a booming world economy.
One final conjecture: Maybe the recent increase in oil prices has been less sudden, making it easier for other prices and thus the economy to adjust. In particular, it may not have affected the skewness in the distribution of relative-price changes in the same way as previous oil shocks did.

We have no shortage of theories. The definitive study on the macroeconomic effect of oil prices is still waiting to be written.