Hormuz Hiccup: Oil Prices Cap Out at $125

The recent oil price scare has come to an end, and for good reason. The Strait of Hormuz, a crucial bottleneck in global oil supply, was not as impactful as many thought it would be. Robin Brooks from robinjbrooks.substack.com suggests that this is due to demand being more flexible than previously assumed. According to Brooks' estimates, the peak oil price for a meaningful encumberment of the Strait of Hormuz is $125 per barrel.

Brooks made this argument in March when he posted and podcasted with Paul Krugman about the potential impact of the Strait's closure on oil prices. He used mid-point academic estimates for the price elasticity of demand to support his claim. Additionally, Brooks points out that global supply has played a significant role in keeping prices from skyrocketing.

Brooks' stance is a contrarian view, as many had predicted oil prices would reach $150 or even $200 per barrel. However, his analysis suggests that the market's flexibility and global supply have mitigated the impact of the Strait's encumbrance.