Oil Price Scare: Demand Flexibility Saves the Day

For six months, I've argued that despite the Strait of Hormuz bottleneck, oil prices wouldn't skyrocket to $150 or $200 a barrel because demand is more flexible than thought. This view was shared in a podcast with Paul Krugman back in March, where we used mid-point estimates for price elasticity of demand to show the peak oil price would be around $125.

The Strait of Hormuz is a major bottleneck for global oil supply, but its impact on prices has been cushioned by flexible demand. This flexibility has allowed prices to remain relatively stable despite the disruption caused by the bottleneck.

Additionally, tight global supplies of distillate fuel oil and elevated crude oil prices have driven up prices in recent months. Crack spreads, which indicate refining margins, are also contributing to higher prices.