The Hormuz Crisis and the Oil Market: Spot vs. Futures – A Straightforward Classroom Explanation

This article is an Econ 101-style refresher designed to explain what happened in the oil market on one hand and one of the more puzzling developments in the oil market on the other: Why physical (spot) oil prices have surged while futures prices have lagged behind. At first glance, the charts may look complex and demand careful attention. But once you focus on the movement of the key lines, they become remarkably straightforward and intuitive.

As you may recall from basic economics (ECON 101), markets exist on a spectrum. On the far left are perfectly competitive markets—characterized by a large number of buyers and sellers, none of whom can influence prices. On the far right sits the pure monopoly or cartel, where a single seller, or a tightly coordinated group, exerts full control over supply and prices.

Between these two extremes lie various forms of imperfect competition, known as oligopolies. The closer a market is to the cartel end of the spectrum, the greater the pricing power of the dominant players.

The global oil market has never been perfectly competitive. It has experienced long periods of strong monopoly-like control—first under Standard Oil, then under the “Seven Sisters” consortium of major international oil companies. At other times, it has fallen under near-total government control, whether through the Soviet Union’s state monopoly, the Texas Railroad Commission, the Oklahoma Corporation Commission, or the U.S. price controls of the 1970s.

OPEC, for its part, is frequently mislabeled a “cartel” by the media, even though it has never fully functioned as one in the strict economic sense. For the past five decades, the oil market is best described as an oligopoly: a handful of large producers occasionally wield some market power, but heavy government intervention, regulations, and national oil companies have consistently stripped away much of the “competitiveness” that defines textbook models.

All of the above is simply to make one crucial point: The classic supply-and-demand diagram—featuring an upward-sloping supply curve intersecting a downward-sloping demand curve—is a simplified model that works well for perfectly competitive markets. That’s precisely why it is so widely taught in colleges and used in everyday discussions. However, it does not accurately reflect the realities of the oil market, which is far from competitive. Properly modeling an oligopolistic market with market power, strategic behavior, and institutional rigidities requires far more advanced charts and frameworks—tools typically reserved for graduate students and academic researchers.