The Strait of Hormuz and the Global Oil Market

Answer the following questions to check your understanding of the story.

What happens to consumer surplus in the global oil market if the Strait of Hormuz closes?

a) Consumer surplus remains unchanged.

b) Consumer surplus decreases.

c) The effect on consumer surplus is uncertain.

d) Consumer surplus increases.

Wrong! - A higher price and smaller quantity cannot increase consumer surplus, and this effect is predictable.

That's Right! - Consumer surplus decreases because consumers pay a higher price and buy a smaller quantity.

Would closing the Strait of Hormuz create an economic cost for society?

a) No. It moves the equilibrium in the global oil market from one efficient outcome to another.

b) No. It increases the revenue earned by producers.

c) Yes. Deadweight loss occurs because some mutually benefit trades don’t happen and oil exporters face higher costs.

d) Yes. Deadweight loss occurs because a higher price transfers some surplus from consumers to producers

Wrong! - The supply decrease is caused by a deliberate restriction, not a random shock. Producer revenue may rise or fall depending on the elasticity of demand, and gains to producers do not mean society gains. Transfers from consumers to producers are not deadweight loss.

Correct! - The decrease in the quantity represents mutually beneficial trades that do not occur. Oil exporters also face higher costs.

What happens to producer surplus in the global oil market if the Strait of Hormuz closes?

a) Producer surplus remains unchanged.

b) The effect on producer surplus is uncertain.

c) Producer surplus decreases.

d) Producer surplus increases.

Wrong! - A smaller excess of price over marginal cost and a smaller quantity sold decrease producer surplus, and this effect is predictable.

That's Right! - The excess of price over marginal cost and the quantity sold both decrease, decreasing producer surplus.

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