The International Monetary Fund (IMF) says the war in the Middle East, which has precipitated an energy crisis similar in scale to the 1970s oil crisis, should spur countries to accelerate their adoption of renewable energy to strengthen their resilience to energy shocks.

Speaking at the release of the latest World Economic Outlook (WEO), chief economist Pierre-Olivier Gourinchas said the diversification of energy sources to protect economies from price hikes and supply disruptions was one of the key lessons from the 1974 crisis.

“It’s very clear that the best way – and this is something a number of countries did already in the 1970s and many more countries will do now – is for countries to find ways in which they can diversify their sources of energy [and to] rely more on sources of energy that they can produce domestically. Often that means renewables and so we are likely to see a big push in that direction,” Gourinchas said.

The war, he added, “should spur faster adoption of renewable energy, which can strengthen resilience to energy shocks, improve energy security, and support the climate transition”.

Asked about how the current crisis compared with previous shocks, he said it was comparable to the 1974 oil price shock.

“Our estimates right now is that if the conflict were to stop today, the oil shortfall for the year – including the fact that facilities have been damaged and it will take time for them to come back online even if everything were to stop today – is comparable to the shock from the 1970s in terms of how much oil has been withdrawn from the market on an annual average basis,” he said.

“There are, however, two important differences compared to that shock. The first one is that the global economy is much less oil-dependent now than it was back then. There are many other sources of energy – renewables, nuclear and other things – and also the global economy has become much more efficient in terms of how much it needs oil to produce GDP.”

A second source of resilience, Gourinchas said, was based on changes made to central bank policies since the 1970s, with the focus now being on reining in inflation rather than trying to support economic activity.

“That’s a critical difference with the 1970s and it’s something that is going to be important going forward,” Gourinchas said, arguing that the main lesson from that period was not to act in a way that allowed an energy shock to turn into an ongoing inflation problem

Central banks had adopted frameworks that allowed them to focus on price stability and, because they were more independent, households and businesses also had an expectation that they would act on that mandate, keeping inflation expectations in check.

“So, while central banks can’t do anything about the price of oil, they can do something about preventing the emergence of wage-price spirals and a de-anchoring of inflation expectations.”

In its ‘reference’ scenario released with the WEO, the IMF is assuming that the war will be of a limited duration and scope, and that global growth will be 3.1% against the 3.3% forecast in January.

Under this reference case, the IMF is projecting an average oil price for 2026 of $80/bl, based on an assumption that there will be a resolution to the war that will support a reduction in energy prices in the second half of the year.

However, it also released ‘adverse’ and ‘severe’ scenarios with far less benign growth and inflation outcomes and Gourinchas indicated that the outlook was probably already somewhere in between the reference and the adverse scenario, with the latter scenario projecting growth of only 2.5% and inflation of 5.4%. The ‘severe’ scenario, meanwhile, pointed to global growth of only 2% and inflation of 6%.

“Every day that passes and every day that we have more disruption in energy, we are drifting closer to the adverse scenario,” he warned.

Nevertheless, the IMF still felt that central banks could wait and watch before moving to raise interest rates.

“But if they see signs that inflation is taking hold, if they see signs of wage-price spirals, if they see signs that households and businesses are starting to expect more permanent and persistent inflation, then they will need to take action.”