What is the one-day elasticity of world demand for crude oil?

From the AP:

In a sudden blow to the nation's oil supply, half the production on Alaska's North Slope was being shut down Sunday after BP Exploration Alaska, Inc. discovered severe corrosion in a Prudhoe Bay oil transit line.

[...]

Once the field is shut down, in a process expected to take days, BP said oil production will be reduced by 400,000 barrels a day. That's close to 8 percent of U.S. oil production as of May 2006 or about 2.6 percent of U.S. supply including imports, according to data from the U.S. Energy Information Administration.

From Reuters:

London Brent crude climbed as much as two percent to $77.73 a barrel, within reach of its all-time high of $78.18, on expectations that the United States would scour world markets for replacement oil. At 1223 GMT it was up 93 cents at $77.10.

Now for the ridiculously premature--and wrong-headed--math.  Assuming world demand didn't shift, a 2.6% decrease in world oil supplies yesterday resulted in a 2% increase in prices today.  That's a 1 day elasticity of demand of 1.3...that's pretty elastic.    I thought the demand for crude oil was inelastic.  What's going on?

Correction--Lynne Kiesling points out that the 2.6% decrease in supply is a 2.6% decrease in U.S. supply--not world supply.  The % change in world supplies is much lower and the elasticity is much smaller than I report.  The lesson?  As always--I'm an idiot.  Thanks Lynne, you win today's free lifetime subscription to Env-Econ.

Well, commodity traders are rational.  They know, that a short-term 2.6% shock in world oil supply is unlikely to cause major disruption in the world oil market--a slight ripple, yes, a major disruption, no.   

Now gas prices, that's a different story.  It wouldn't surpise me to see gas prices jump 5-10% or more today just on this news alone. 

Comments

[Dano]

Welcome to the future: resource scarcity unless we change our consumption patterns.

Best,

D

[Mr. Nobody]

This makes me recall Richard Roll's 1984 AER article, Orange Juice and Weather. Supply shocks are the main cause of OJ price movements (short-run demand is very stable). Although weather should be the main explanation of the price volatility, it only explains a small portion in the movement. Roll ends the article stating that, "[t]here is a large amount of inexplicable price volatility."

Guys in behavior finance have a better answer than me but I was thirsty; therefore, I thought of the OJ article. Off to get a drink of water. Later a small glass Flora de Caña on ice.

[lkiesling]

Tim,

The 2.6% reduction in quantity is a US %, not a global %, but the % change in price is a change in a world price. I haven't done the math, but I would expect that 400K bpd would be a smaller % of global supply, which would reduce the numerator of the elasticity calcuation.

[andy mendyk]

i think the biggest losers here would be the refiners local to valdez/southern alaska who don't have a feasible plan B for crude supplies. the bulk of refining in the us seems central to the gulf or other population centers in the us. these guys are probably fortunate enough to have the ability to turn on other suppliers relatively easily. amazingly, i had a hard time finding some concrete stats on where prudhoe bay oil actually goes. i did find a lot of good info at the eia's site (below).

http://www.eia.doe.gov/oil_gas/petroleum/info_glance/petroleum.html

[Tim Haab]

Thanks Lynne, I read that wrong (but if I would have thought before I wrote it I would have realized how ridiculous the numbers were). Now I'm going to delete the post--author's rights.

[lkiesling]

C'mon, Tim! I think "idiot" is way too strong! When I saw the news I didn't even think to impute elasticity from the numbers, so you are being way too hard on yourself :-).