A supply shock is an incredibly powerful concept that can change the entire global economy. It can significantly alter the availability of goods and services, leading to steep price increases or decreases depending on whether the shock is positive or negative. In today’s world, supply shocks can be caused by a wide variety of factors, from unexpected disasters to political or social unrest in a certain area.

A positive supply shock can lead to prices falling due to increased availability of goods or services. This happens when a sudden event increases supply, such as when a natural disaster has the opposite effect of reducing demand. A positive supply shock can occur when the technology associated with a product or service is improved, or when a new production method is implemented that lowers costs.

A negative supply shock can lead to prices rising due to decreased availability of goods or services. This happens when a sudden event reduces supply, such as when a natural disaster ruins crops, or a war interrupts trade. Restrictions in trade, due to political unrest or tariffs, can also lead to a reduction in supply. More recently, the outbreak of the COVID-19 pandemic has caused severe disruption in global production and supply chains, leading to negative supply shocks in some regions.

In terms of commodities, crude oil is particularly vulnerable to supply shocks due to the volatile political and social climate of its main source countries in the Middle East. These countries are characterised by frequent political upheavals, military conflicts, sanctions, and other external pressures. As such, any disruption in the delivery of oil from the region can cause a shock to the global price of crude oil.

All in all, a supply shock can have a profound effect on prices and the availability of goods and services. The degree of the change is dependent on whether the shock is positive or negative, but both scenarios have the potential to disrupt the economic balance. Therefore, it is important to understand the causes and implications of a supply shock in order to be better prepared for their potential effects.