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?
Greedflation: Price gouging by corporations during an inflationary period, especially when the underlying cost of production has not risen accordingly.
If there are 300 life jackets on a sinking ship being sold for $10 each on a ship with 300 people on it. No problem.
No, imagine there are only 299 life jackets on that sinking ship.
The 2 people who want the last life jacket might be willing to bid quite a bit higher than $10 for it, even though the supply only shrank by a fraction of a percent.
In short, supply reduction doesn’t carry enough information on its own to imply how much the price will increase. “How fucked are the customers competing to buy the remaining product if they can’t get it” is the other key factor.
If there are 300 life jackets on a sinking ship being sold for $10 each on a ship with 300 people on it. No problem.
Ohh, I think there’s a problem…
What econ101 does to your brain is not normal. Into to Econ has y’all seeing a sinking ship and the first thing to ask is “how much is this life jacket worth in dollars”?
This is just an illustration and has nothing to do with the actual situation. Life vests are free in emergency. You’re making a fuss over nothing.
I posted this in another thread the other day but it bears repeating.
It’s not even really about the refineries not getting any oil supply. Refineries are setup to use SPECIFIC oil feedstock chemistries, if you try to substitute that oil for a different type (light sweet vs heavy sour or mid mid, etc) the process either doesn’t work, or it wastes a significant chunk. To convert a refinery to use a different feedstock, it takes a significant amount of engineering time, then you have to effectively SHUT DOWN the whole unit, redo parts of the equipment, then run it back up, test it, and tweak the process variables. Refineries plan this years out and it takes 6+ months to do if nothing goes wrong. Then, they are basically locked into that new feedstock again.
Doing any kind of supply shock like this is dumb for any number of reasons. It’s even dumber when the critical components to rework the refineries is in shorter supply because people keep blowing up the existing equipment. Lead times on some of this stuff is in the 20+ month range duing normal times.
There will not be an easy adjustment, the 10-20% loss in supply figure is misleading at best. This is going to impact everything that uses oil, plastic, fertilizer, lubricants, valves, electronics, etc and its not going to be a 10-20% impact…
Oh. I thought all crude oil was the same crude oil. Thanks for the info.
That assumes you can get a different type of crude. If a different refinery is setup for texas light sweet crude, they are likely able to take all the oil Texas can pump, and they have pipelines in place from Texas to them. Even if you convert your refinery you can’t get any of that crude because it is under contract to the other refinery and they can afford to outbid you because their shipping costs (via the pipeline) are lower.
10 years ago (approximately) there was a North Dakota oil boom - the crude from those wells was shipped via a railroad that goes very close to a Minnesota refinery, but that refinery is setup for Canada crude (including a pipeline) and so the trains went right on by without stopping. The oil ended up in East Cost refineries that had been mothballed (that is shutdown) for years, but they were able to take the North Dakota crude and so reopened. I don’t know the current situation - other than a suggestion that the owners of those refineries were not planning to do more than minimal maintenance - that is if something major breaks they would tear down the refinery instead of repairing it (this of course has likely changed several times as the market changes).
You also have to remember that since oil is a commodity price driven item, the producers don’t want to overproduce, that means they plan 5-10 years out on speculative demand so there is a lag of up to years before they can expand production in some cases. No one wants to spend billions of dollars increasing production capacity only for the price to fall down on its face again and burn up your investment.
A LOT of the production capacity in Corpus Christie is also about to get shut off since they (the refineries) have essentially fucked their own ability to get water required to refine the oil. The whole region is about to drain itself dry and the state isn’t doing shit to stop it.
From a high level, this is about supply chain disruption and market confidence. This 20% impacts the entire world, and there is no clear time frame to any resolution.
Oil is used in almost everything, so the gas at your pump is competing against everything from medical plastics, to jet fuel, lubricants, fertilizer, you name it.
Gasoline for vehicles is a very easy place to squeeze out profits in a very uncertain environment.
Honestly this is just basic economics. If theres less supply but the demand stays the same the prices will continue rising until the demand matches the supply. If you for example say “I will have to buy gas to commute no matter what to make it to work” and many people use fuel like that it will shorten supply and make the prices go higher until people use up less fuel. Ofc I know oil is used for more than just fuel for cars to commute but this is just an illustration.
Thats also why subsidizing the prices directly is highly ineffective as it doesn’t actually mean there is more supply on the market and no incentive to save money. If people use a more limited supply of oil as if it was much as there is normally this will spike the prices again until supply and demand match again. Most likely direct subsidies go directly to the oil companies. And if many countries do this it turns into a bidding contest basically where every (except the oil companies that still supply) lose
Oil products have highly inelastic demand. Most uses for it don’t decrease much when prices change. You still drive to work, trucks still deliver goods, furnaces still heat buildings, etc. There are only marginal cases where people can reduce usage: optional trips, driving instead of flying, things of this nature. Because of how marginal these uses are compared to the more mandatory ones, demand does not respond strongly to price changes. Therefore, prices change significantly more quickly.
Edit: Demand destruction is a thing, however. Maybe you buy a hybrid or a factory closes. No matter what happens with oil prices next year, that factory is still closed and you are still driving the more gas efficient hybrid.
More detailed background: https://en.wikipedia.org/wiki/Elasticity_(economics)
Price is rarely 1% for 1%. Some things people will still use in similar quantities even if there are high price increases (e.g. life saving medication). Others people will stop using even if there are small price changes.
Yeah thats basically the answer summed up in a wikipedia article
Yep.
There’s no necessary correlation between actual decrease in
scarcitysupply and increase in demand because of human psychology. Contrary to what economic theory would have you believe, market participants (consumers/buyers, supplier/sellers) don’t (always) behave rationally. When people hear there’s going to be a shortage of something, they panic and rapidly increase demand which rapidly raises prices.Alternatively, the oil industry knows that it is basically untouchable as long as we’re dependent on oil and can set prices pretty much however they like. “There’s a war” is a popular excuse for increases.
Edit: decrease in supply, of course.
This video helped me understand it a bit more. Basically the condition is that there’s not an immediate replacement for oil in the things that use it and that usage of oil is not going to drop by 20% to cover the reduction in the supply. Since oil is an inelastic product and we can’t significantly reduce the consumption in response to higher prices in the short term, this causes a more steep increase in price to balance the supply/demand.
If the global demand is 100x and the global supply is 100x all needs are covered. If the global supply drops to 80x then the needs are not covered, and people scramble to get what they need at any expense. As prices rise more and more people look for ways they can avoid the product until a new equilibrium is reached–this percent increase cost is not correlated with the percent decrease supply.
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).
Capitalism, corporate greed, and oil cartels.
Not all oil is made into gasoline.
What I find interesting is I was paying $4.30 for premium while regular was $2 something before the stupidity started. Now I pay $4.70-$4.90 for premium and regular is $4ish
Regular has gone up far more than premium, I wonder how much diesel has gone up?
Diesel seems to have gone up slightly more. Diesel tends to be somewhat less elastic - people are using this for work they consider important. You might not make a long distance trip (stay home, or travel to something closer to home), but you won’t stop buying things shipped with diesel. In some cases you are substituting a trip to the store (gas) for deliver (diesel, but because it is a combined trip overall less fuel used)
All of the answers around “what people are willing to pay” and “refinery mechanics” are ignoring the massively increased profits that oil companies have enjoyed in Q1 2026.
It’s gouging. They don’t have to charge customers more, or shortchange labor, they just do. Because they can, with impunity.
You can’t pump gas out of an oil well. It has to be transported, refined, transported again, then burned. The price can fluctuate wildly in that time.
the 20% is the estimated reality now. the 60% is what the market is betting the real price will be.
