income by importing capital goods. 3 it should be noted, however, that this additional demand – owing to the oilexporting countries ’ specific needs – might lead to sectoral shifts in the production pattern of the euro area economy. obviously, with oil prices being increasingly driven not only by demand - side concerns, the nature of the current shock might eventually become closer to that of its predecessors. apart from the size and nature of the shock, the resilience of advanced economies like the euro area stems from a structural change in their dependence on oil. owing to the growing importance of the services sector, which now accounts for roughly 70 % of gdp in the euro area, the relative weight of the energy - intensive industrial sector has declined since the 1970s. accordingly ( and also due to a growing ecological awareness ), the oil intensity of industrial countries, defined as the total amount of oil consumed to produce one unit of gdp, has been halved during the past 30 years. finally, the reaction of economic agents, namely trade unions, has contributed to the muted economic impact of the current oil price shock. strong global competitive pressures, particularly in the manufacturing sector, as well as relatively high unemployment rates significantly weaken the bargaining power of today ’ s trade unions. inflationary pressures resulting from potential second - round effects and wage - price spirals have so far been much more contained than in the 1970s. the credibility of low - inflation regimes has now been well established. therefore, inflation expectations have so far remained well anchored at low levels. this has allowed central banks to maintain a more accommodative monetary policy stance, thereby providing ongoing support to overall demand. 4 it should be clear by now that, for all these reasons, the oil price shocks of the 1970s differ strongly from those of today. the recently changing nature of the current oil shock with supply - side factors gaining more importance implies a certain risk, however, that this benign scenario may not extend into the future. central banks therefore have to closely monitor ongoing developments and act appropriately if needed. but what is an appropriate response? the trade - off faced by monetary policy does the current benign environment mean that oil price shocks have lost their potentially damaging effects and are no longer a challenge for monetary policy? in my view, this is not the case. a stabilityoriented monetary policy cannot afford to treat oil price shocks with benign neglect. a natural starting point to discuss this topic is provided by current macroeconomic thinking on the determinants of

– has taken more than two years to unfold, much longer than on previous occasions. moreover, unlike its predecessors, the present price hike is explained by substantially different factors. shocks in the 1970s were caused mainly by sizeable disruptions to the oil supply, which seriously dampened the confidence of companies and households. now, there is a variety of factors. as they are partly structural in nature, however, it is all the more likely that the present shock will prove to be permanent. to a large extent, the current oil price shock has been driven by unexpectedly buoyant demand for oil, particularly in the us, and by rapidly growing emerging market countries – especially china. china ’ s share in global oil demand has more than doubled in the past 15 years ( 3. 5 % in 1990, estimated 8. 2 % in 2006 ). despite higher oil prices, the demand from china is expected to persist, because its underlying growth development is still ongoing. for example, jimenez - rodriguez and sanchez ( 2004 ) for the main oecd members ; schmidt and zimmermann ( 2005 ) or the german council of economic experts ( 2004 ) for an analysis of oil price effects on the german economy. the declining economic impact of oil price increases over time has led some researchers to study these issues in a non - linear framework. walton ( 2006 ). the latest price hike, however, is being put down mainly to supply - side factors, namely, to heightened geopolitical concerns over the security of future supplies, especially in iran, iraq and nigeria – or the recent events in bolivia. both factors are aggravated by yet another supply - side argument : spare capacities in both refining and production are limited, as the investments of oil producing countries have been responding too slowly to the unexpected pace of demand growth. now, it is taking time to open up the bottlenecks. this view has been recently accentuated at the g7 - meeting in washington where, amongst others, a strengthening of the dialogue between oil producers and consumers and further investment in exploration, production, energy infrastructure, and refinery capacity has been demanded. the fact that the bulk of the current oil price shock – unlike its predecessors – has been demanddriven is often said to alleviate its impact on economic growth. oil price shocks lead to a negative domestic demand effect in oil - importing countries resulting from a loss in terms of trade. a demanddriven shock offsets this impact somewhat as foreign oil producers recycle part of their