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?
There is a concept in economics called price elasticity, which is how the market adjusts to changes in supply and demand. If there are more alternatives for the product or the product is a luxury, the price is usually considered “elastic” as people will stop using the good over paying more for it.
Oil is price inelastic. For a lot of equipment, there isn’t an immediate substitute for oil and people need oil to do a lot of important economic activities. So, if there is a reduction in supply, a lot of people will pay more money to make sure they get their oil, which drives up prices far more than the lack of supply would normally suggest.
That being said, goods are usually more price elastic in the long run. For instance, people might choose an electric car right now over a gas powered car because electric cars now are a lot cheaper in comparison for total use costs.