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?
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…
Rose Dewitt Bukater safe
But the reality of your hypothetical situation would be fighting not bidding. So I call bullshit on your story.
Supply is controlled, demand is artificially created and nurtured by capitalists because its a way to capture the market.
We are all being manipulated into thinking they are honest when the exact opposite is true.
The straights of Hormuz is closed because the fascists/capitalists are making money, plain and simple.
Good luck living in their reality. Tell the fox that you are not hens and you might survive.
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”?
Completely agree, actually.
This isn’t what I think someone should do. It is morally abhorrent. This is just a contrived scenario to try and prime an intuition to help OP understand why small changes in supply can have outsized effects on price.
If at any point someone sees human suffering or danger and thinks “profit opportunity”, I have a hard time understanding why that person should be permitted to continue to participating in society freely.
It’s a contrived example.
This isn’t hard to understand
Its an apologists answer. Keep towing their line trying to reform them and maybe they wont hit you again.
Yes exactly. Replace the life jackets with Pokémon cards and the moral dilemma goes away. Cruise ships are required to carry enough life jackets and to give them to the passengers for free in an emergency. If someone is selling life jackets on a sinking ship then society’s rules have broken down, and it wouldn’t be surprising for people to get violent as they struggle to survive.
Replace the life jackets with Pokémon cards and the moral dilemma goes away.
If I’m on a sinking ship, I don’t think I’m really going to be caring about Pokémon cards.
No, of course not. But that’s not a very charitable take, is it? Obviously the sinking ship situation goes away with the life jackets and the setting for buying the Pokémon cards is more typical, like a convention or a hobby store.
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…
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.
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.
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.
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.
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?
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.
Not all oil is made into gasoline.
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 whole fucking market is a scam to take more money from people.
because the system is rigged
Capitalism, corporate greed, and oil cartels.
