Oil Market Dynamics

Any disruption to any of the 17 million barrels flowing through the Strait of Hormuz each day would change the fundamentals of the global oil market. A supply shock would leave a certain group of consumers who expected to take delivery of the disrupted tanker's cargo scrambling for alternative sources of supply. In the short run, they would presumably continue their operations using oil from the inventory cushion that most businesses (including essentially all refineries) build into their corporate strategies. But to maintain their normal inventory levels, they would need to find new sources of oil, so they would enter the market again to bid for new contracts, putting upward pressure on the price of oil. Buyers might bid especially aggressively, perhaps seeking to expand inventories above the normal level to protect against the possibility of a sustained disruption.

But that is not the end of the story. Oil suppliers throughout the global market would react, in some cases very quickly. Those governments and firms with significant stockpiles of oil might take the price increase as an opportunity to sell inventory at a profit (or states might release inventory from strategic reserves simply to ameliorate the price increase). At the same time, those states that maintain excess production capacity will have an incentive to "pump" more oil " again for financial gain. In the long-term, higher oil prices should also spur additional investment in oil exploration and production infrastructure.

This page last modified in August 2008