Twice in recent years the nation has been warned that an oil shock would cripple the global economy, first with Russia’s invasion of Ukraine in 2022 and now with the Strait of Hormuz closure. In both cases, oil prices surged and the panic was loud. Yet both times oil prices quickly fell back to low levels and there was no measurable economic damage.

The reason is simple: oil isn’t as important as it used to be. Yes, petroleum remains an important commodity. Airlines need jet fuel. Trucks need diesel. Many industrial processes depend on petroleum products. But as economists put it, the demand for oil across the broader economy has become more elastic. Shifts in oil supply are not as disruptive and the resulting price effects are far more muted. Put plainly: when oil supplies tighten, the world now has more and quicker ways to adjust.

That reality has important implications for U.S. energy, environmental, and foreign policy. It is time to end the myth of U.S. oil dependence.

This past February, when the United States and Israel began strikes on Iran and Tehran responded by restricting traffic through the Strait of Hormuz, the reaction was predictable. Oil prices jumped. Analysts warned of a historic energy crisis.

Fatih Birol, executive director of the International Energy Agency, weighed in with a grim prognosis, calling it the “largest disruption to the global oil market in history.”1 The International Monetary Fund warned that “all roads lead to higher prices and slower growth.”

Cable news regular Mark Zandi said in a March CNBC interview that “unless the hostilities are coming to an end now… I think recession is more than likely by the second half of the year.” Mohamed El-Erian was not far behind, arguing that a recession was highly likely if the Strait was not reopened by mid-June.

The public absorbed the negative sentiment and consumer confidence plunged to record lows in April and then again in May. Politicians reached for the usual playbook: strategic reserve releases, gas-tax holidays, subsidies, windfall taxes, and other attempts to shield consumers from higher costs.

Yet even as elected officials fretted over what to do, the markets told a different story. After initially surging, oil prices quicky began falling back toward where they started—even without a major increase in global production, without meaningful use of emergency reserves, and without any sort of agreement with Iran.

From the peak seen in late May to early July, oil prices declined to below $70 per barrel—only slightly above where they were before the conflict began. As hostilities have heated up again, prices have also risen, but to just above $80 per barrel. Something very similar occurred in February 2022 when Russia invaded Ukraine, setting off a global oil panic. That year, oil peaked at $120 per barrel in June but fell back to $80 by September despite the ongoing conflict.

Why have oil prices fallen back so quickly? It hasn’t been driven by the use of strategic reserves. The International Energy Agency had its members commit to releasing 400 million barrels of oil at the start of the conflict—but only a fraction has actually been released. And note, that amount represents only four days of pre-conflict global usage.

Nor has there been much increase in oil production outside the region—there simply hasn’t been enough time. At the end of June, output from the United States—the largest oil producer in the world—was roughly the same as it was at the start of the year.

The primary market shift that has allowed prices to decline is that the global economy simply shrugged off the supply reduction. As it turns out, overall demand for crude oil has become far more price elastic in recent years—a term economists use to measure the degree of substitutability for a specific product. A product that an economy is truly dependent on will have low elasticity and even a small decrease in supply will lead to large price increases as buyers compete over limited availability.

Of course, parts of the economy are highly dependent on oil and have very inelastic demand. Airlines, for example, have few options when oil prices rise—they need jet fuel, and crude oil remains the only major source. But these sectors are increasingly the exception rather than the rule. Most parts of the economy have greater flexibility today.

Many sectors that use crude oil as an input can also use natural gas, including agricultural fertilizers, which are often cited as a major vulnerability during oil price spikes. Natural gas production has grown at twice the pace of crude oil over the past 50 years, and new technologies allowing the transportation of this resource in liquid form (LNG) have expanded access even to nations that don’t produce it domestically. More importantly, very little natural gas moves through the Strait of Hormuz.

And while gasoline still comes primarily from crude oil, there are now more transportation alternatives. Vehicle fuel efficiency has improved significantly through advances in combustion engines, including hybrid systems. At the same time, improvements in battery technology have created a revolution on the roads—by one estimate, roughly one-quarter of new cars sold globally today are plug-in hybrids or fully electric vehicles.

Changes in the products we produce, and the technologies used to produce them means the U.S. economy simply does not rely on crude oil the way it once did. U.S. crude oil consumption averaged 17.5 million barrels per day in the 1970s. In recent years, it has averaged roughly 20 million barrels per day—a gain of only about 15%. Over the same period, the size of the overall U.S. economy has grown by roughly 400%.

Oil consumption has grown faster globally than in the United States due to rapid economic growth in formerly poor nations such as India and China. But even globally, oil consumption growth has roughly doubled while overall output growth has increased fivefold.

On the other side of the equation has been a steady increase in both oil production and proven reserves, which are up roughly 80% since the late 1980s. Much of this new supply is produced outside the Middle East, a region that over the past 40 years has gone from holding approximately two-thirds of the world’s proven reserves to holding less than half.

New transportation and vehicle technologies have also been combined with new drilling technologies that are cheaper and faster, constantly pushing the market to the edge of oversupply—as traders discovered at the start of the pandemic, when a rapid decline in demand caused oil prices to briefly turn negative.

Today, the dramatic 75% rise in oil prices needs to be balanced against the fact that this wave of new supply has pushed oil and gasoline prices almost to their lowest levels since the start of the century, after adjusting for inflation. Even after rising to $110 per barrel, oil prices have remained significantly below past peaks.

Similarly, U.S. gasoline prices were near record lows in real terms before the recent supply shock. Even the May peak of $4.70 per gallon only brought prices back to roughly the inflation-adjusted average seen throughout much of 2005 to 2011—and below levels reached in the late 1970s.

Just as importantly, while gasoline prices have returned to levels seen 50 years ago, real incomes have grown substantially over the same period. Last year, spending on motor fuel made up only 2% of total U.S. consumer spending, the lowest share outside of 2020, when the pandemic kept people home. In May of this year, even as oil prices spiked, spending on gasoline and other fuels represented just 2.5% of overall consumer spending.

I appreciate that none of this lines up with current conventional wisdom. A full 67% of respondents in a recent Gallup poll said that today’s rising gas prices were causing them financial hardship. But as always, surveys capture economic narratives, which may or may not reflect economic realities.

The same share of survey respondents said the same thing during the 2021 surge in gasoline prices. Yet over the following year, the United States experienced record-low consumer delinquency rates on auto loans and credit cards and near-record-low bankruptcy filings.

Moreover, last year, 84% of new vehicle sales were light trucks, and the Ford F-150 pickup truck, not exactly a fuel efficient vehicle, has been the bestselling vehicle in America since the 1980s. Electric vehicles and hybrids still make up less than 10% of the nation’s total auto fleet, and electric vehicle sales have slowed recently. Actions speak louder than words, and most Americans do not appear to be making decisions based on extreme concern over gasoline prices.

In truth, the vast majority of American consumers are perfectly capable of paying somewhat more at the pump without falling into financial ruin (I’ve said the unsayable out loud). Similarly, fears of oil-driven inflation have been wildly overblown. Price levels can be temporarily affected by short-run fluctuations in the cost of a product, but long-run inflation is, as Milton Friedman famously argued, “always and everywhere a monetary phenomenon.”

Rising oil prices in the 1970s have often been portrayed as the cause of that era’s inflation. But those simplistic explanations leave out the excessive growth in the money supply that was already creating inflationary problems before oil prices surged. Oil may have provided the spark, but it was excessive monetary growth that supplied the fuel.

A recent Federal Reserve report supports this interpretation. According to its analysis of the 2022 oil price spike, there was almost no passthrough from oil prices into core inflation.12

To be fair, there were plenty of economic analysts who estimated less dire impacts from the recent price surge, but such views usually end up buried in news coverage—if they are included at all. That’s unfortunate, because this unnecessary panic keeps public attention away from where it should be… focused on our dangerously large federal budget deficits, expanding financial bubbles, and destructive political partisanship.

The real lesson from the conflict with Iran is that oil is no longer as economically pivotal as it once was. Immediately, this matters most in terms of the deal the United States will eventually make with Iran to reopen the Strait. The longer this drags on, the clearer it will become that Iran’s one major playing card is not nearly as powerful as we’ve all assumed.

If the goal of the conflict is truly to defang Iran, there is no reason to give away the farm on the basis of an economic crisis that exists only in the headlines.