How it works step by step:
Oil price rose sharply
For example, because of the crisis or supply risks - as it is now, against the background of supply problems through the Strait of Hormuz.
What happens immediately?
Refining companies (refineries) cannot reduce consumption instantly.
Why:
- planes are already flying
- factories are already operating
- logistics is already set up
Business takes the hit
Companies are starting to buy expensive oil, but:
- prices for their products are still old
- contracts have already been signed
As a result:
companies' margins are falling, profits are shrinking
This is the first and most important buffer of the system.
Then the transfer to the consumer begins
After a while, the business says:
"you can't go on like this."
And begins:
- raise prices
- review contracts
- include costs in the cost of goods and services
There is inflation.
And only then demand dies
When prices rose:
- people fly less
- they buy less
- companies are reducing production
this is where the real drop in oil demand begins
And only then the oil price drops
When demand is really decreasing:
- oil is becoming "too much"
- warehouses are filling up
- the market is cooling
the price is going down
In short:
The high price of oil does not kill demand immediately.
First, it kills the profits of the refiners. Then he accelerates the prices.
And only then - the demand itself leads to a drop in prices.
Oil prices do not fall when it becomes expensive, but when the economy can no longer pay for it.
