Almost 8 months into Trump’s war on Iran, we can see more clearly the consequences of this quagmire. Some have been quite unexpected, like the surprising resilience of the oil market, the emergence of multiple failure points outside of Hormuz (including Bab-al Mandeb, the East-West pipeline, and global refinery capacity), and the increased risk of regionalization for the conflict. These issues have no doubt taken a lot of analysts by surprise.
📌 The Core Development
Others, like Trump’s reluctance to admit he messed up, have been quite expected.
But today I want to talk about something else. I believe this war has either caused or displayed a seismic change in the way global oil markets work. I believe that for the first time since oil is a thing, oil demand is becoming elastic.
🔍 Background & Sector Context
And since so far I haven’t seen anyone make this claim, I wanted to put my hypothesis up for debate.
When speaking about demand, economists normally use the terms elastic and inelastic to determine how much consumption will fluctuate when prices go up or down.
📊 Industry & Real-World Impact
Some things, such as food staples, are consumed at quite stable levels. People will keep eating roughly the same regardless of their economic situation (unless very, very dire), and likewise, people who become wealthier are unlikely to eat much more: someone who just got a job paying double is not going to suddenly buy twice as many potatoes. This means that food demand is considered inelastic. Keep in mind this works the other way around: if potatoes suddenly halve in price, it’s unlikely that someone will suddenly start eating double the amount of them.
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🔮 Strategic Outlook & What Lies Ahead
(I apologize to all the economists reading this if my examples are too simple or otherwise dumb, but these were the best ideas I had in mind.)
For a very, very long time, oil demand has been considered inelastic. Since people need to commute to their jobs, visit their relatives, and move products around regardless of income or oil prices, oil consumption has remained roughly constant (with a tendency to increase over time), with demand increasing a bit faster if oil is cheap and a bit slower if oil is expensive. In this context, oil demand has historically required an economic crisis to go down: either the economy slows down for unrelated reasons and oil demand falls with economic activity generally (as happened during the 2008 subprime crisis), or oil prices go up so much that they cause a recession, only falling back down again through reduced economic activity (as happened during the 1973 and 1979 oil crisis).
