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’s a common misunderstanding that reduction of supply by x% will increase price proportionally. This is being taught in basic economy classes but it comes with assumption of preftectly flexible market. This is NOT how things are in real life.
In real life manufacturing runs at less than 100% capacity and as long as it’s below that number price doesn’t move. Manufacturers usually prefer to increase production first and rise prices only after reaching full saturation. Once it happens market turns into auction: prices rapidly grow until somone is unwilling to buy. If demand is inflexible (meaning it doesn’t react to price changes by much) this can be very brutal.