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?
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.