The factoid thrown around is that roughly 20% of the world’s oil supply travels through the Strait of Hormuz. Since it closed, my local gas prices in one area of the US midwest have gone from $2.60 to now $4.10 presumably as reserves have been used up.
I could understand a 20~30% increase in price to correlate with the reduction in supply, but what are the economic factors that lead to what feels like such a disproportionate increase?
Why would a 20% reduction only lead to a 20% price increase? Pricing depends on what people are willing to pay for it. For example, if Rolex were to make 20% more watches, would they still be able to sell at the same price? And not just in the short run, but also in the long run? The market for Rolex would get over saturated, and prices would drop significantly more than 20%. (for Rolex it would be even worse, since they would lose clientele at the high end of the market).