I was curious and decided to venture a guess as to what the price of oil might be some months out if the Hormuz blockade goes on for a while longer.

A Google search for “price elasticity of oil” produced results suggesting that the short-term price elasticity of oil is around 0.1.

Reports have indicated that the blockade is blocking about 19% of the world’s oil supply. Saudi Arabia is diverting some of its oil to its Red Sea port, so let’s say about 17% of the world’s oil supply is being cut off. It might be still a little less than that, but let’s just go ahead and use that figure.

I then went to Gemini (Google’s AI) and asked it what are the implications for the future price of oil, say, 5 months out, given a price elasticity of oil of 0.1 and a reduction in supply of 17%.

Here’s what Gemini calculated:

If, at the beginning of that 5-month period oil were $70, at the end of the 5 months oil would rise to $189/barrel.
If, at the beginning of that 5-month period oil were $90, at the end of the 5 months oil would rise to $243/barrel.

When the blockade began around March 1, oil was around $65, IIRC. 5 months from then would be August 1, so, if the blockade continues to then, we can expect oil somewhere in the $150-$170 range.

Right now oil is around $90, so if we only start counting from today, 5 months from now would be mid-September, where we would expect oil to be in the mid-$200’s by then if the blockade continues.

I would guess at that point there would be some serious demand destruction kicking in via a recession or even a depression, so at some point the price could start to tumble after the world economy has crashed sufficiently.

Every oil analyst I’ve read who’s crunched the numbers have said that it’s already gone on long enough to kill off a huge chunk of the world’s inventories in the near future, so even if the blockade stopped tomorrow things would still get very bad for many more months, likely into next year. But of course it’s not going to stop tomorrow.

Link to Gemini conversation below:

Oil Price Shock: Elasticity and Supply

I think in the end, Donald Trump may end up being the best thing to happen to electric cars ever! 😛

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