Why doesn't demand simply fall to close the gap?
The last lesson blamed frozen supply. That is only one blade of the scissors. The defining feature of commodity markets is that demand is inelastic too — and when both blades are stuck, price is the only moving part left in the system.
Four reasons buyers can't cut quickly
- The capital stock is already built. Fuel demand is set by the cars, planes, boilers and factories that already exist. A high price does not un-build them. You can drive a little less; you cannot un-buy the car this month.
- It is a small share of a big bill. Copper might be 1-2% of the cost of a building. Doubling it barely changes whether the building gets built — so the buyer keeps buying.
- There is no substitute available today. Substitutes exist (next unit), but switching a battery chemistry or a power plant's fuel takes engineering time, not an afternoon.
- Some of it is necessity. Calories, heat and light are not deferrable in the way a new sofa is.
Notice that every one of these reasons is really about time. Elasticity is not a fixed property of a commodity — it is a property of a commodity at a horizon. Over a week it is near zero. Over a decade it is meaningful.
A worked example
A household spends €150 a month on motor fuel, out of €3,000 of total spending — 5% of the budget. Fuel prices rise 50%, so the same driving now costs €225.
- The extra €75 is 2.5% of the household budget. Painful, not life-changing.
- The household trims some trips and cuts consumption by, say, 5%.
- Implied elasticity = −5% ÷ 50% = −0.10.
Multiply that household by the world and you get the number from the last lesson. Nobody behaved irrationally; the commodity is simply too essential and too small a line item to abandon quickly.
The surplus works the same way, in reverse
Everything above is symmetric, which people forget. A 2% surplus is just as hard to absorb: buyers cannot suddenly consume 2% more oil either. The escape valve is storage — someone puts the extra barrels in a tank and waits.
Which means the surplus case has one extra failure mode: storage can run out. In April 2020, pandemic demand collapse met a supply that could not stop fast enough, and physical storage around the US delivery point filled up. On 20 April 2020 the expiring WTI futures contract settled at −$37.63 a barrel: for a few hours, the market was paying people to take delivery of oil, because holding it had become the more expensive option. That is not a market malfunctioning. That is an inelastic market with nowhere left to put the surplus.
Try it now
- Continuous WTI over the longest window this page holds is below. Find April 2020 on it — switch to Daily bars and use the range buttons to get there — and Measure the collapse and then the recovery that followed it. Note how quickly the move reversed once storage pressure eased: the shortage was in tanks, not in barrels.
- Estimate your own fuel or heating elasticity: what price rise would make you cut consumption 10%? Divide to get your personal number.
- Say the general rule out loud: inelastic on both sides means the price does all the adjusting — upward in a shortage and downward in a glut.