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?
Think about all the oil you use as a regular person- for heating, transportation, fertilizer for your foods, etc.
Now say the price goes up by 20%. Would you, in response, consume 20% less? Would you heat your home 20% less and eat 20% less and go to work 20% less? Of course not.
The estimated 20% reduction in worldwide crude production means, somehow, somewhere, as a world we have to use 20% less oil. Then the question is, how high does the price have to rise to force people to consume 20% less?
How expensive will it have to get to force people to heat 20% less and eat 20% less and drive 20% less? I don’t know, but it’s going to get worse, because we aren’t there yet.
There is actually no reason for those two percentages to be the same, they derive from different concepts.
The price balances at the point where demand and supply are equal. If the market was balanced before, and supply shrinks by 20%, that means the price rises until 20% of demand is priced out of the market.
You can think of it as a bidding war among the 100% of previous demand for the remaining 80% of supply. The 20% poorest, or more precisely the 20% most price-sensitive, on the demand side, loose this bidding war and don’t get any of the remaining supply.
If 95% of the demand can afford a 20% increase in price, then the bidding war just continues.
If 90% of the demand can afford a 35% increase in price, then the bidding war just continues.
If 85% of the demand can afford a 50% increase in price, then the bidding war just continues.
If 80% of the demand can afford a 60% increase in price, then that’s the new balance of the market.
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.
Greedflation: Price gouging by corporations during an inflationary period, especially when the underlying cost of production has not risen accordingly.
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.
Oil is globally priced so even if you have your own production in America, prices go up there as well. It benefits the producers a lot but leads to higher prices for the
slavesconsumers.You will therefore have oil in America but Asia and China will have a huge crisis since 80% of the oil from Hormuz goes to those countries, and now its cut off by Americas blockades.
So higher prices in America, but it forces China, India, South Korea and Japan to try and buy oil from America.
So this war is about making those countries depend on Americas goodwill for resources. If they dont go along with what Trump is saying, no deal.
Not true.
Prices here in South America have not gone up.
The only reason prices would go up globally would be capitalism, if you trade it for profit.
Nobody should be allowed to profit from burning fossil fuels.
Which country? Consumer fuel prices have been subsidized to artificially suppress them in a number of places, Brazil for example. The profits are still being made but the rise in prices is being shifted onto the public via govt. debt so it gets paid through future taxes instead of showing up immediately at the pump.
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
Part of the problem is gas supply is artificially kept low so the gas companies can increase demand and charge more (eg they intentionally underproduce). Because of that when unpredictable shocks hit the system the prices fluctuate wildly. For example during the pandemic no one was driving and the price of gas dropped dramatically in response. Even going into the negative one beautiful day. The oil companies didn’t know this dumb ass war was coming and didn’t have the opportunity to adjust production in preparation. It takes time to adjust the supply line. Yes they like high prices, but if they let it get too high people start talking about gross things like bike infrastructure and trains. And countries experiencing energy blackouts start considering solar panels and battery banks from China. OPEC+ doesn’t like that. Add to that some oil production infrastructure has been blown up - permanently taking it out of the supply line. The shortages are going to exponentially build because there are backlogs and bidding wars. I’m honestly surprised the gas is still this cheap.
Greed.
It doesn’t. The world is full of greedy psychopaths.
“You’ll pay it and be happy we won’t raise it further”
Counter to intuition this is actually a good thing. Not that they do good things… But it causes monopolies like the OPEC to fracture so some countries can pump more oil now due to increasing prices.
Also I suggest you read “the prince” by Machiavelli.
And narrow minded marxists
Its a commodity that only sum can reduce usage of. People who commute to work by car and don’t have an alternative can’t stop buying much less gas. Maybe they can get a carpool thing going but that is not easy at all. So like countries reducing the work week by a day or make it mandatory wfh will allow many people to reduce 20% but the trucking won’t be able to reduce. so people reduce only when the economics force them to. Factories might shutdown if the cost of fuel is over what they can seel for and such.
Because the whole fucking market is a scam to take more money from people.
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.
because the system is rigged
Capitalism, corporate greed, and oil cartels.
