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If tomorrow the supply of oil dropped 5, 15, 25% … etc how much would the price per barrel increase?

I would be happy with even a rough estimate but I would like some kind of justification.

The scenario would be the Strait of Hormuz closing due to war.

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In real-time nobody can know the answer, but using Dario Caldaraa, Michele Cavalloa and Matteo Iacoviello 2019 estimates of price elasticity of supply for oil from 1985 to 2015 which was -0.1 (this means that 1% increase in supply leads to -0.1% decrease in price and reverse is also true), the best educated guess is: 0.5%, 1.5%, and 2.5% increase.

However, these numbers always change from time to time, and the estimates are just average estimates. The elasticity usually changes with prices so margins of errors here are very large.

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  • $\begingroup$ If supply of oil drops by 25%, the price will only rise 2.5%? $\endgroup$ Aug 5 at 22:56
  • $\begingroup$ @Maximus1987 based on average elasticity between 1985 to 2015 yes, in reality probably no. As I told you in my answer this is impossible to answer in real time. Also, I dont think that any person here will go out of her way to spend weeks to model your unrealistic scenario to make better forecasts for internet points. $\endgroup$
    – csilvia
    Aug 5 at 22:59
  • $\begingroup$ @csilvia Also, can we get the change of the equilibrium price just from supply elasticity? Seems like it would provide an upper bound even in case of marginal changes. $\endgroup$
    – Giskard
    Aug 6 at 5:40
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    $\begingroup$ @csilvia Internet points!!! $\endgroup$
    – Giskard
    Aug 6 at 5:41
  • $\begingroup$ @Giskard demand elasticity is also around 0.1 in that paper $\endgroup$
    – csilvia
    Aug 6 at 19:11

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