Supply Shock
A supply shock is an unexpected event that suddenly changes the supply of a good or commodity and causes an abrupt price movement. If supply falls (a negative or adverse supply shock) and demand remains unchanged, prices rise. If supply increases (a positive supply shock), prices typically fall.
How supply shocks work
- A supply shock shifts the supply curve:
- Rightward shift (positive shock) → higher output, lower prices.
- Leftward shift (negative shock) → lower output, higher prices.
- The price effect assumes aggregate demand is unchanged; simultaneous demand shocks can compound or offset the outcome.
Common causes
Supply shocks can arise from a wide range of unexpected events, including:
* Natural disasters (storms, droughts, crop failures)
* Geopolitical events (wars, embargoes, sanctions)
* Firm-specific production decisions (large producers cutting output)
* Pandemics and public-health measures that disrupt labor and production
* Technological changes that permanently alter production capacity
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Examples
- Oil: Crude oil is especially vulnerable because large shares of reserves are concentrated in geopolitically volatile regions. Historical events such as the 1973 oil embargo and supply disruptions tied to Russia’s 2022 invasion of Ukraine have driven large spikes in global energy prices.
- Zinc (2015): Major producer Glencore cut global zinc output, reducing supply and helping push zinc prices higher.
- Olive oil (2023): Poor harvests driven by weather and climate issues sharply reduced supply, sending prices to record highs.
- COVID-19 (2020–): The pandemic produced both supply shocks (factory and labor disruptions) and demand shocks (sharp declines in services like dining and travel), illustrating how shocks can coexist and interact.
Duration and persistence
- Temporary shocks: Short-lived disruptions (e.g., many episodes during the global financial crisis) that cause transient price swings.
- Permanent shocks: Structural changes (e.g., the widespread adoption of hydraulic fracturing) that permanently alter capacity or trade balances. According to the World Bank, roughly half of commodity price variability can be attributed to persistent shocks.
Economic implications
Supply shocks affect availability, consumer prices, inflation, corporate revenues, and broader macroeconomic conditions. Because they can be sudden and severe, they are important considerations for business planning and public policy—particularly in sectors dependent on concentrated or geopolitically sensitive supplies.
Key takeaways
- A supply shock is an unexpected change in supply that drives abrupt price changes.
- Negative shocks reduce output and raise prices; positive shocks increase output and lower prices.
- Causes include natural disasters, geopolitical events, firm decisions, pandemics, and technological shifts.
- Some shocks are temporary; others produce lasting changes in supply and prices.
Sources
Select reported sources on historical and empirical examples:
* Organization of the Petroleum Exporting Countries (OPEC) — crude oil reserve data
Federal Reserve Bank of St. Louis — analyses of commodity price effects from the Ukraine war and COVID-19
Reuters, Bloomberg, CNBC — coverage of industry supply decisions (e.g., Glencore) and market reactions
U.S. Energy Information Administration — U.S. energy facts and export status
World Bank — research on persistence of commodity shocks
* Federal Reserve History — overview of the 1973–74 oil shock