Price goes up, quantity demanded declines. In other words demand curves are downward sloping. Short run demand curves are steeper than long run demand curves: IOW it takes a bigger jump in price to result in a smaller change in demand. An oil price shock consists of a shift in a supply curve along a demand curve. Higher prices (we’ve seen that) and lower output/consumption (we’re seeing that now).
Spot prices for oil rose to almost $150 per barrel earlier. Futures prices, which are the ones typically quoted in the news, are near $95 now. That’s quite a gap. The simple explanation is that the market is speculating that this situation will resolve itself within the next month or so. Which sounds nuts to me, given this back-of-the-envelope matrix from Krugman’s website a couple of weeks ago:
I’m not an petroleum market specialist, but I’d expect spot prices north of $110 on May 10th. I’m honestly puzzled by the market’s behavior. That prices could fluctuate by 5 or 10 dollars per day isn’t surprising, since traders have to speculate about unknowables. But the $90-100 range just seems low to me. Someone is missing the plot, could very well be me.
I’m right there with you. I have no specific dog in the hunt for the price of oil, but I am interested in the price of global commodities, as those will affect me and everybody else on the planet.
“Shift in the demand curve” vs. “Shift along the demand curve”, is a common stumbling block in introductory economics. The IEA report is describing the 2nd, the capsule summary in Reuters makes it sound like the first. To confuse matters, both are plausible. The IEA report states, “…demand destruction will spread as scarcity and higher prices persist.” IOW, people will consume less oil in responses to higher prices and lower oil availability. That describes a backwards shift in the supply curve along a downward sloping demand curve.
In terms of both of ours confusion, the early days of the war provides a hint. Traders are used to reacting to the utterances of leaders, so when Trump spouted his usual and fairly transparent lies, prices reacted when the market really should have been treating what Trump said as noise. Paraphrasing from memory from a report over the past week: “Traders are dubious about Trump’s utterances, but don’t want to be caught on the wrong side of the trade.” My memory is mangled, but even allowing for that I’m not sure what they’re thinking other than, “The market can be irrational longer than you can be solvent.”
Krugman suggested (last year?) that the market is more of a conventional wisdom processor than a rational actor. That’s his take: it’s not a formal conclusion of his backed by theory or statistics. So maybe possibly there’s a small degree of very human political bias creeping into oil traders’ perceptions. But the same could be said about me so…
Strategic expert Phillips P OBrien steps outside of his wheelhouse to discuss the financial markets’ ability to endure crises. He is puzzled, at least some of the petroleum analysts he conversed with are puzzled as well.
In my midweek update I wrote about what seems to me a certain excessive optimism in the Oil market. This was because even though the basic strategic situation between the US and Iran has at best remained unchanged for weeks (and arguably become worse), the market was manifesting a marked tendency to take any assurance Trump gave as an excuse to opt for lower prices. At the same time, the markets tended to disregard some pretty strong evidence that we could be about to witness a serious economic shock.
Which left me scratching my head: Trump’s blatherings are noise and the fundamentals suggest heightened recession risk to my way of thinking.
Interestingly after I sent that out I was contacted by a few people with knowledge of the oil markets who said that they were surprised by the price movements and that people who know the market best were actually the most cautious.
Not sure what exactly that means, but I guess @Railer13 and I are not alone.
Cite and partial article for non-subscribers:
FWIW Brent oil is now at $106, trending towards my seat-of-the-pants price target of “Above $110, I mean c’mon that should be a soft floor”.
TWEEEEEEET. The fundamentals have locked in place. Now we just have to peer through the noise, which I hasten to say isn’t easy.
Trump is anticipating an extended blockade of Iran according reporting by the WSJ. Rawstory says that, “Trump appears to be digging in and trying to tighten the screws on Iran’s economy.” Furthermore according to the WSJ, “[Trump] assessed that his other options—resume bombing or walk away from the conflict—carried more risk than maintaining the blockade, officials said.”
Today Brent oil futures breached $110 (my upthread target). Iran apparently has some ability to run the blockade: I can’t tell how much. For the first 30 days or so, the oil markets were reacting to vapor as the previously shipped oil tankers were still in transit. Now physical shortages are beginning to pinch: California is struggling a little to obtain jet fuel from its South Korean suppliers in the face of shutdowns of various California oil refineries. Bloomberg:
Jet fuel exports from Asia to California are at the lowest point in at least a decade, adding another pressure point to a burgeoning air travel crunch on the West Coast stemming from the war on Iran.
With two days left in April 2026, only one confirmed cargo of jet fuel has departed Asia for California, according to energy analytics firm Vortexa Ltd. The Jag Parth, carrying 210,000 barrels of jet fuel, departed South Korea on April 19 and is expected to arrive in the Los Angeles area on May 8.
I think Iran can hold out longer than Trump can. A high disruption scenario places oil in the $150-$370 range. We’re getting near the point where swing state oil will be reliably above $4.00 (in Georgia it’s $3.65, in Nevada it’s $5.07, PA is $4.26). Trump’s base is extremely credulous, but independents are souring on this administration.
Meanwhile Iran is making active preparations for Trump resuming hostilities. They are jerking around Team Trump diplomatically, while making state visits to Russia et al.
Phillips P OBrien thinks there’s an 80% chance that Trump will climb down and secure a worse deal than Obama delivered the American people and world back in 2015, the one that Trump abruptly cancelled. I say that’s the hopeful scenario and that Trump should have declared victory and gotten out weeks ago, but that his weakness, vacillation, and procrastination will seal his party’s defeat in November.
Gas prices average $4.18 in the US. Trump snaps at what, $4.50? Not even double the $3.00 price before his foreign adventure. That implies that Trump is planning on staying tough with Iran through August, but that he will cave before the end of June.
“If you must forecast, forecast often.” If prices are at $100 on May 10th, I’ll have to figure out what I got wrong. Similarly, if the blockade holds through August 10th. The latter will be easier to explain, since the former depends on the economy and behavior of oil traders while the length of the blockade is tied to speculation about an elderly, egotistic, imprudent, and ignorant man with declining facilities. Is there any serious analyst who thinks Trump has done a great job on this?
I agree, for a number of reasons. There’s the issue that since Trump is so dishonest and treacherous, there’s really no incentive for the Iranians to compromise or negotiate in the first place. Conceding anything to Trump would just encourage him, and any promises he makes can be safely dismissed.
Then there’s the issue that they are an authoritarian regime facing an existential threat from outside. Trump has already killed leaders and demanded both unconditional surrender and the ability to pick a new leader; so why should they surrender when surrender means death or losing power (and then death, probably)? Meanwhile, standing up to Trump makes them look stronger, while Trump’s attacks strengthen their legitimacy and support. Again, no incentive to do anything but stand up to Trump until it’s outright impossible to do otherwise. “Surrender and die” makes for a bad ultimatum.
And then there’s the problem that authoritarian regimes have historically been able to stand up to economic pressure up to and including mass starvation for years. I doubt Trump has the patience to wait years, and they should certainly be able to hold on long enough that legally he should be out of office anyway.
This is an existential threat to Iran, and a temper tantrum for Trump. I’m quite sure the Iranians have more staying power short of Trump breaking out the nukes.
And agree that Iran can hold out longer than Trump can (or the American consumer). Der Trihs is correct that this is an existential threat to Iran, but for many Americans, they don’t even know what is really happening, and all they see is prices rising at the pump. Some may blame Biden or Democrats or Woke, but a lot are going to blame the current administration.
Americans will blink long, long before Iran if the gasoline prices stay high or increase.
If Iran can hold, then the question is: How will Trump manage defeat?
I think that the most probable reaction is to simply declare that he won and refuse to acknowledge reality.
But there’s a significant and worrying probability that he escalates things somehow
Escalation will be ineffectual, though it may also limit Trump’s post-Presidential travel outside of the US because of war crimes.
The US economy is more resilient to oil shocks than it was during the 1970s. The US economy was fairly strong during the first 2 months of this year due to the AI boom. But that means prices need to go higher to inflict sufficient pain. One way or another oil consumption must decline (oil analysts call this, “Demand destruction”) to match the physical decline in supply. Currently the gap is mostly being covered by sharp rundowns in oil inventories. That can’t last indefinitely.
Iran has a new weapon: it’s called the Strait of Hormuz. They want to use it to inflict harm on the US and world economy, then ostentatiously show mercy and what passes for judgment to provide aid to the world’s poor (via fertilizer and shipments to India). I can’t imagine them pivoting before Brent oil hits $120 (two times above pre-war levels) but what do I know? I’d expect significant movement if oil rose to the $150 range, but my intuition about the mullahs is weak. I don’t even speak Farsi. I don’t think there’s reasonable basis for the West to rule out oil at $200+. If there’s any through-line here, it’s the strong consensus among all players in this conflict: public welfare doesn’t matter. What matters is keeping existing leaders away from courts and tribunals.
I wonder if Trump realizes today that we started a thing in Iran, and that it is still going. New Ballroom seems to be on his mind more than anything else.be
So far, despite much higher oil prices, demand for oil has fallen by only a fraction of the loss of supply. Instead, the world economy is running by taking oil out of storage. Since there’s only so much oil in the tanks, this can’t go on. So if the Strait doesn’t reopen, prices will have to soar high enough — and inflict sufficient economic damage — to destroy another 11 or more million barrels a day of demand. That’s a lot.
But Trump is talking about his ballroom.
This may seem weird, but it makes sense if you view it psychologically. Trump is clearly dissociating. His fragile sense of self-worth depends on constantly believing that he’s a winner while others are losers. Now he’s faced with the reality that he, more or less single-handedly, led America to humiliating strategic defeat.
So Trump is coping by tuning out the war he started, focusing on a grandiose, ego-boosting project that lets him assert dominance over servile Republicans and businesses that are footing the bill.
The Iranian leadership is tough. Washington Republicans are the opposite. Bullies seek soft targets. The corrupt seek large projects with concealed financing.
But while he may be done with his war, the war isn’t done with him…
When you poke a hornets’ nest, the hornets decide when the battle is over. The US public does not see the benefit to the war and will demand an end to it via the ballot box in November. The Iranians have the will to keep calm and carry on because they have no other choice. At some point, Don the Con will move on to other things and find some excuse to declare victory and pull out. I’m betting we’re out before July.
Let’s say the mullahs govern impressionistically. Brent oil peaked at $138 in June 2008 and $126 in May 2022. Those are monthly figures: the dailies presumably were above that. They will want to beat those numbers: they will want to raise oil prices above 2022 Russia-invades-Ukraine levels, especially if they can smuggle some oil out. If their team monitors US gas prices as well as Explosive Media studies US culture, they will want to top the $5.02/gal average from 6/22/2022. “Higher gas prices than Biden.” We’re now at $4.23, so there are a ways to go, about 20%.
What does “Significant movement” mean? Would good western reporting even detect it? I’m going to have to retract that claim due to ambiguity and the above reassessment. I do think there are milestones near $150 though, which world leaders will notice.
I still think the issue of Trump’s untrustworthiness means they can’t really afford to back down. They can’t afford to offer any concession because Trump would just take it and go back on his side of any arrangement. They have to make him back down since his words mean nothing; only his actions matter.
What the Iranians need is to have Russia give them the unredacted Epstein files. Or Bondi could sell them to them. She works cheap. But that could get them nuked.
Iran needs to inflict some pain under the theory that while Trump cannot be trusted he may be can be trained not to do something because he relates it with pain.
When I was being bullied at school, after trying my mom’s suggestions of trying first to reason with the bully and then to ignore him, I asked my father, who told me to fight him.
“even if he defeats you he’ll learn that messing with you exposes him to a fight, he will then look for other, less bothersome, victims”.
It worked for me, it may work for Iran.
Devastating—and obviously quite accurate. Yet Republicans-in-office are still fingers-in-ears going ‘Lalalalalala’ as loud as they can.
In other words: the discussion of what Trump might do and what the mullahs might do takes for granted—with good reason—that though Trump is clearly unfit to be in charge, he will remain in charge. Republicans won’t remove Old Noddy though he’s bringing down the USA faster than even Xi could dream.
Another very, very sad truth. Those in charge on all sides are ‘fine’ with letting the world burn, so long as their own personal fortunes (and freedom) are preserved.
Paul Krugman is a strong writer and highly intelligent analyst as well as a Nobel level economist. He has a misstep in today’s piece, the first I’ve ever IDd in my decades of reading. So MfM is thrilled. (To be sure Krugman has gotten predictions wrong before, but that’s different from a realtime error in analysis.) Krugman:
Realistically, the only way to reopen the Strait of Hormuz is for both sides to stand down — for Iran to lift its de facto embargo on shipping through the Strait, while the U.S. lifts its blockade on Iranian shipping.
Such a mutual stand-down wouldn’t require negotiating a formal deal, nor would it require that either regime trust the other. All it need involve is for both sides to stop doing what they are doing. And the way to such a non-deal remains open. Indeed, the Iranians announced on April 17 that they would allow traffic through the Strait to resume…
So what is preventing the reopening of the Strait? Three factors: Trump’s ego, his ignorance, and the Iranians’ unfortunately justified belief that any agreement they reach with America would be effectively worthless.
No: it’s four factors, the fourth being the Iranian’s desire to demonstrate the value of their shiny Hormuz deterrent by inflicting damage on the world economy and Trump’s chances in November. Sure Iran could agree to stand down, but in practice that would mean limited shipping out of the Hormuz. The April 17 announcement should not be taken at face value.
That aside, it’s another great article. The unreliability of Trump as a negotiating partner is indeed central, also noted by Der Trihs. Will the Iranians give up nuclear material in exchange for… promises by the US? Of course not. Will the Iranians make any concession that can’t be yanked bank if Trump renegs? No. So is there an easy face-saving way out for Trump? Not really. I suppose they could pay a bribe to Jared and Witkoff. Payed in installments of course.
As a result, Iran won’t make any concessions that weaken its strategic position — which means that it won’t offer Trump anything that he can use to declare victory.
How will this end? Unless Trump is willing to commit massive war crimes — and the U.S. military goes along — it will end with the non-deal that was already on the table weeks ago: America ends its blockade while Iran opens the Strait. Iran will emerge poorer but strategically stronger. And America will have suffered its worst strategic defeat in history as a result of a completely gratuitous misadventure to please Trump’s ego.
The question now is: how much destruction will the world, and America, have to bear before Trump is willing to accept reality?
We discussed that question yesterday.
ETA: During the 1990s Trump stopped building in New York City, because contractors no longer wanted to work with him, once they figured out that he was a crook. Same thing is happening now, only on an international scale. But Krugman errs by ignoring Iran’s bad behavior: Krugman thinks that Trump is the only barrier to settlement. I’m not drawing a false equivalence. I am observing that Iran’s agreement to open the Strait earlier was slow-walked. Iran gets to be a factor as well.
