Oil crisis: David Cameron to set up a support group for the North Sea oil industry
Over 5,000 jobs have been lost in the UK's North Sea oil and gas sector due to the fall in oil pricesReuters

It is not for the first time that the annual gathering of the World Economic Forum in Davos has coincided with panic in the financial markets. But what has intrigued me this time is the way that the collapse in the price of oil over the past year or so has been lumped in with fears about asset price bubbles and a potential crisis in the bond market as unremittingly bad news.

It is certainly bad news for countries heavily dependent on oil for both exports and domestic budgetary revenues, not least Russia. And there has been a spate of bankruptcies among oil and gas companies caught out by the plunge in prices they assumed would remain at a much higher level.

The impact on Saudi Arabia is more nuanced. It is generally assumed that the Saudis need a crude price of some 80 dollars a bulk barrel to balance their budget. On the other hand a price of around 30 dollars is well above their costs of production, reckoned at around a mere 7 dollars.

Against the background of the shale revolution in the US the Saudis have stuck to a policy of maintaining market share, however low the price falls. They are playing a very long game.

Just to add to the factors depressing the price is the re- entry of Iran onto the scene. If there is one thing I have learned in following the gyrations of the oil price over the years it is that forecasts, even by industry experts, can often be very wide of the mark.

But at a time when there is so much gloom about the sustainability of economic recovery and about the putative limits to monetary policy, the fall in the price has come as manna from Heaven for all those Western economies, and Japan, that were hit badly by the successive oil shocks of the 1970s.

For what we have witnessed in the past year is the obverse of the experience that badly shook the the advanced industrial countries that made up the membership of the OECD in the 1970s.

As the economist John Llewellyn, now running Llewellyn Consultants, but then at the OECD, observed after the first oil shock of 1973-74: "For decades after the Second World War we had simply taken cheap energy for granted."

When OPEC flexed its muscles and quintupled the price from around 2 to 3 dollars in 1973-74, the impact on the oil importing nations was devastating. Most countries were already grappling with acceleration inflation. The oil price hike was a double whammy: it added to inflationary pressure, while being deflationary in removing purchasing power for domestic goods, as countries such as Britain had to pay a lot more for imported oil.

Many members of the present generation are amazed when I tell them that the rate of inflation reached 26.9% in August 1975. By contrast, inflation in the UK and the eurozone is now negligible. Those so called powerful central bankers cannot even 'achieve' the low targets either set for them, in the UK, or by them, in the case of the European Central Bank.

The low oil price has been a welcome boost to purchasing power. But, in view of the general sluggishness of economic activity, and widespread concerns about worse to come, it is surely time for governments and central banks to have a complete re-think about their approach to macro-economic policy.

For years the main constraint on a much more expansionary approach to economic policy was fear of inflation. There is now widespread fear of deflation. The oil shocks of the 1970s called for restrictive policies. The situation now calls for the reverse.