Why an 11% Oil Supply Drop = a 220% Price Spike! #money #financeexplained #investing #oilcrisis

Added: 2026-05-17

[00:00:00]An 11% drop in global supply mathematically requires a massive 220% increase in the price to balance the equation. Before we even get to the oil price, there's a financial bottleneck that hits instantly. The cost of risk.

[00:00:14]Even if the strait isn't completely blocked by military action, the sheer threat of a rocket attack or mine strike destroys the actuarial math for global shipping. Every single tanker moving through these waters carries war risk insurance. And in peacetime, that premium is a tiny fraction of a percent of the whole's value. But after an explosion, that premium can instantly jump to 5% or more. So, for a $200 supertanker like this one, that means the cost of a single voyage spikes by $10 million overnight. Very quickly, ship owners refuse to sail, crews refuse to board, and the floating pipeline simply halts. You don't need to put a physical wall to block the strait. You just need to make the insurance risk uninsurable.

[00:00:56]This brings us to the most terrifying math of all, the price spike. So, why does an 11% drop in global supply cause prices to triple? Well, it comes down to a fundamental economic principle called the price elasticity of demand. Oil is highly inelastic. You still need to drive to work, and the logistics companies still need to move goods, products, food, regardless of what the barrel costs. Now, the formula is really quite straightforward. We just need to rearrange the formula to solve for price and factor in the shift in quantity demanded. Historically, the elasticity coefficient for the oil market has hovered near -0.05.

[00:01:31]Consequently, when the numbers are crunched, the results are really quite staggering. An 11% drop in global supply mathematically requires a massive 220% increase in the price to balance the equation. In a crisis, algorithmic trading and panic buying by nations holding fuel act as aggressive multipliers. This leads to a brutal economic concept called demand destruction. The price doesn't just go up, it weaponizes, skyrocketing until it literally bankrupts poorer nations and forces them to stop buying energy entirely.