When oil prices first soared in 1973-4 they were blamed for the recession and collapse which occurred in western economies. In practice there were other things wrong with the economies then, with banking difficulties and a switch from easy money to tight money at the same time. It is also true that in those days western economies were more dependent on imported oil. The Uk was just developing the North Sea oilfields. Western countries had a bigger manufacturing sector which used more energy than the services which came to replace some of it.
Oil price hikes since have done less apparent damage, though they are not helpful to the western importing economies who rely on foreign oil. There is always an inflationary impact. The fuel price is important in its own right, and fuel prices also tend to push up other prices, as fuel is needed for transport and production of many other goods.There may also be a deflationary effect. As people and businesses have to spend more on oil, they will have less to spend on other things, unless they can push up prices and wages enough in an inflationary way.
This latest oil price rise is unlikely to lead to successful inflationary pay settlements in the US, the UK or the Eurozone. It will be one more reason why living standards get hit. It will be a deflationary force on the economies later this year, to add to the downwards forces of slowing demand in the emerging market countries, and tight bank credit in the post bubble retrenchment by the western regulators. If the loss of oil output is on a Libyan scale, and is temporary, the price rise might abate as that becomes clear. If the troubles spread into Saudi Arabia and production there is damaged, the markets may well take fright and push the price considerably higher.
Most forecasters assume there will still be a good supply of oil from the Middle East, and that overall global economic growth will continue at a reasonable rate this year. Now, however, forecasters and policy makers should take note that there could be disappointment later in the year. Money is tight in the west, and getting tighter in the emerging markets economies. If the oil price goes too high on top of this, it will curb the growth and cause particular difficutlies in troubled economies like Greece and Ireland.