15% or so of the supply of oil comes through the Straight of Hormuz. If you close it, you remove a significant amount of supply from an inelastic market. Most people still need to get to work, make deliveries, or stamp out plastic parts, even if it costs them twice as much as last week. That can slow an economy down, possibly tipping it into recession, and reducing the need for oil, but short term demand is what it is. That kind of inelastic demand means a small drop in supply has a big increase in price.

There are things that have highly elastic demand, but I just can’t think of any that are something besides an item that you don’t want. Like winter coats in the summer. If the northern hemisphere stores were out of winter coats in July, it would only impact people traveling to far-South destination. But the same good, in a cold winter, can become inelastic when supplies are low. Suddenly, a small reduction in the supply causes prices to rise.

The elasticity, therefore, is not a constant like atomic mass. It varies with other conditions. Healthcare in an inelastic good, partly by design. By keeping the supply of new doctors low, part of the high cost is maintained. But it’s not just the cost of the doctor. It’s also the cost of an MRI machine, a surgical robot, or a drug that requires a long, complex process resulting in a low yield. The hospital wants to keep the MRI machine at maximum utilization to recover the cost as quickly as possible. A hospital bed is unused real estate unless there’s someone in it. Having lots of excess capacity in the system in case of emergency may make policy sense, but not economic sense. The systems operate to minimized unused assets, resulting in an inelastic demand during an emergency. Which usually results in queuing more than price gouging.

It doesn’t pay to have a lot of unoccupied housing as part of policy. The supply of housing is kept artificially low in some ways. For example, zoning laws can limit the ability to build multi-family housing in desirable areas. If there were plenty of empty housing units to be occupied, housing demand would be highly elastic. An increase or decrease in the supply wouldn’t effect the price of a house. But the supply is constrained in desirable areas, with a limited ability to add new supply. Therefore it’s inelastic unless no one wants to live there. Small towns being abandoned in Europe and the US are offering incentives, like the famous 1 Euro houses or moving bonuses. Their housing is highly elastic.

We might want to moderate the impact of prices by helping with the demand side. For example, offering first time home buyers special financing, guaranteed loans, or even subsidies to make the house more affordable. The problem is that it usually results in prices rising. The supply didn’t change, but the demand increased. Since the good in inelastic, it goes up in price. The real solution is on the supply side, but increasing supply is much easier said than done. Building new housing can take anywhere from weeks to years, depending on factors ranging from permits to financing to labor. On top of that, if the supplier views the current situation as a temporary glitch, they do not want to be put at risk if demand subsides.

A case in point is the single US manufacturer of PPE. During the pandemic, the first Trump administration made localities fight each other for scarce PPE supplies, Hunger Games style. That usually involved shady deals with Chinese suppliers that could be scams or fall through at the last minute. The sole remaining US manufacturer almost went out of business when the previous epidemic subsided and everyone went back to buying from the cheapest supplier. He did not expand his business during COVID-19. The normal condition for the PPE market is highly elastic, and fifty cents more expensive for a box of 1,000 paper masks, meant you didn’t sell a box of paper masks. And no one was going to fix the lack of sales, after he buys equipment and hires workers for a temporary problem.

If you want to fix most of the price problems associated with inelastic markets, it’s the supply that must be increased. Generally, the price comes down once the supply goes up to the point there is spare supply. This is hard to do because it may mean dealing with some awful people (property developers). Normal administrations, staffed with smart people, may see a policy of expanding fossil fuels as not a good long term policy. (And we already subsidize the fossil fuel industry in pursuit of cheap energy). Or in the case of medicine by having excess capacity by de-risking that idle capacity and expanding the pool of trained professionals. (Much easier said than done).

In the Straight of Hormuz, the US is going to try to bring prices down by escorting ships and subsidizing insurance. As more fuel moves through the straight, it will bring down the price of gas. (Note that some of the fuel is sanctioned Iranian crude going to China via intermediaries – something the administration may find unacceptable. But that forces China to bid up the price of crude). It will allow our allies to sell crude at still elevated prices (because even a small change in the supply of an inelastic product drives prices). And this only works if Iran can’t strike the escort or the tanker. We’ll see if it’s enough of a risk mitigation to allow the suppliers to start moving crude again.