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?
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.