Polonomic Weekly;
The Commodity
Domino Tips
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Liam Scotchmer
“Up like a rocket, down like a feather.”
$60 for Brent crude is now ancient history; the price of Brent crude is now around $100 a barrel following the US and Israel’s joint attacks on Iran that happened on February 28.
These attacks have halted the flow of oil tankers through the Strait of Hormuz; a vital passageway where roughly one-fifth of the world’s oil passes through on a typical day.
Brent crude oil, the international standard, has been sent soaring with crazy swings almost everyday. At one point it surged to nearly US$120 a barrel, before falling to under US$90.
If One Of The Commodity Dominoes Tips, The Entire Line Begins To Topple
Why is this important? Oil is a crucial commodity, and its markets are some of the most closely watched in the world. The price of it is a broad indicator of the entire economy’s health impacting everything from the cost of transportation to what we pay for the petroleum based plastic food containers at the store.
What happened to oil is what we call a supply shock, an event that makes production more costly.
Dan, owner of Laneway Cyclery, a bike shop; not related at all to the automotive industry, is experiencing these effects; he saw a 120% increase in input costs in a period of 5 days.
To account for this rise in input cost, he raised prices across the board; which is rational from his point of view; it does mean however for some services or products he is earning positive economic profit, something important to note for later.
More specifically, what happened is:
Oil shock happened -> wholesale costs rose -> Dan raised his retail prices -> his customers start buying less at that price -> Dan sees slower sales -> he orders fewer inputs next round.
Graphically, Dan’s cost curve shifted up, and to the left. At this output, less is produced and prices are higher for consumers.
But how can he get away with higher prices?! Well, it's different in the short run vs long run.
Supply Shock
Dan has loyal customers. His service is different from others (called product differentiation); his customers will possibly still pay higher prices in the short run for loyalty alone. But on top of this, his customers can't move shops easily for a service elsewhere, perhaps increasing the chance he can get away with higher prices in the short run.
Short Run - Prices
However, in the long run, Dan’s demand curve will shift to the left; lower output and lower prices. This is because there will be entry into the bike market by firms who see positive economic profit is being made, reducing demand for Dan’s services.
The 120% price rise won’t stick; prices will either settle somewhere above the original but below the spike, or if the oil shock is temporary, prices may revert.
Long run - Prices
Ultimately, it’s monopolistically competitive; low barriers to entry, product differentiation, and many sellers. Zero economic profit will be made (economic profit is not the same as accounting profit!). Any economic profits are eroded in the long run, unlike a monopoly market structure.
Long Run - Profit
In 2022, it took twelve days for oil prices (Brent) to peak after Russia invaded Ukraine, but 148 days for prices to fall back to prior levels.
“Up like a rocket, down like a feather”
End
References
AAP & CBA Newsroom. (2026). Oil shock from Iran war prompts International Energy Agency to release largest ever volume of emergency oil. Commbank. https://www.commbank.com.au/articles/newsroom/2026/03/iea-announces-record-oil-reserve-release.html#:~:text=Travel%20insurance-,Oil%20shock%20from%20Iran%20war%20prompts%20International%20Energy%20Agency%20to,reluctance%20to%20tap%20into%20stockpiles.
Evans, K. (2026, March 9). Kelly Evans: The oil shock. CNBC. https://www.cnbc.com/2026/03/09/kelly-evans-the-oil-shock.html
Gans, J., King, S., Byford, M. C., & N Gregory Mankiw. (2021). Principles of microeconomics. Cengage Learning Australia.
Laneway Cyclery. (2026). Laneway Cyclery on Instagram. Instagram. https://www.instagram.com/reel/DWTbmHMkVLp/?utm_source=ig_web_copy_link&igsh=MzRlODBiNWFlZA==
Ross, S. (2021, August 27). Why Do Supply Shocks Occur and Who Do They Affect? Investopedia. https://www.investopedia.com/ask/answers/041015/why-do-supply-shocks-occur-and-who-do-they-negatively-affect-most.asp
Scanlon, K. (2024). In This Economy? Crown Currency.
The Economist. (2026, March 23). How high could global inflation go? The Economist. https://www.economist.com/finance-and-economics/2026/03/23/how-high-could-global-inflation-go