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?
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.