How Long Can the Economy Hold Up?

I've fielded a number of questions over the past few weeks over the impact of higher oil prices (how long can the economy hold up?), as well as unsolicited comments over how the current shock is markedly worse vs the early-70s crisis, and how it ultimately has to end very badly -- economically-speaking.

With regard to the 70s, it's important to note that the economy's dependence on oil today is not remotely near what it was back then. 

And combine that -- per the following -- with the fact that the US is a net "energy" (not crude oil, btw) exporter, and that oil itself today supplies notably less of the world's energy needs vs back in the 70s:

Structural Shifts Since Then — The Three Big Changes

1. Energy intensity of the economy has collapsed. The amount of oil required to produce one unit of U.S. GDP has declined by more than 70% since the 1970s. The U.S. economy has roughly tripled in size since the late 1970s while consuming approximately the same total volume of oil. This is the single most important structural change — the economy runs on far less oil per dollar of output. Real Investment Advice

2. The U.S. is now a net energy exporter. The U.S. is now energy self-sufficient and has been a net total energy exporter since 2019. In 1973, it was the world's largest petroleum importer. Today, the U.S. is the largest producer of oil globally. This is a complete reversal of the geopolitical vulnerability that made the embargo so damaging. Columbia University

3. Oil's share of global and U.S. energy has declined sharply. Oil's share of global primary energy has fallen from 46.2% in 1973 to 30.2% today, driven by natural gas, nuclear, and renewables displacing oil in power generation and industrial use. News24

Also, BCA geopolitical expert Marko Papic on Friday pointed out that oil is essentially less binding than in prior cycles due to demand flexibility from remote work and supply-chain adaptability, which in his view can shave a few million barrels per day if needed.

Bottom line, while oil is indeed still a big deal, it's less so today than it was during previous supply shocks.

Now, all that said, we have to wonder, were it not for the historic expenditure on AI datacenters, would the economy really be holding up this well? 

Per the following, perhaps not.

Here's from BCA analyst Juan Correa's latest article titled "AI Is Still the Business Cycle."

"Capex — not consumption — drives economic cycles. The current AI-driven investment boom is endogenous, meaning firms are spending regardless of consumer health, providing a buffer against the oil shock-induced demand destruction hitting households."

Stay tuned...