Why Oil Prices Are Rising...and Likely to Continue Rising

Why It Matters

The combination of tight spare capacity, a sensitive price elasticity structure, and ongoing regional conflict raises the risk of sharp, sustained gasoline and crude price increases, with broader inflationary and economic consequences for global markets. Policymakers and energy firms face constrained options to quickly restore supply, making volatility and higher energy costs likely over coming months.

Summary

Oil prices are rising and likely to continue climbing because global oil demand is highly inelastic and even small supply disruptions produce outsized price moves. Economist Ed Hirst explains that measured short‑run price elasticity for oil is about -0.047, meaning a 1% drop in supply can lift prices roughly 25%, a dynamic already visible since recent Middle East tensions. Spare output that could replace lost volumes is limited largely to Saudi Arabia and the UAE (a few million barrels a day), while key chokepoints like the Strait of Hormuz carry 15–20 mb/d and are vulnerable to Iranian asymmetric attacks. Planned releases from strategic petroleum reserves—about 400 million barrels coordinated by the IEA—will help only marginally against a prolonged disruption and could fail to offset sustained losses that would push prices far higher.

Original Description

Energy economist Ed Hirs of the University of Houston provides a primer on global oil markets and the effect of the Middle East conflict on oil prices.

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