When you hear the term “demand destruction”, it’s typically followed immediately with a claim that prices will decline with it. Many economists and financial experts make this assumption. I don’t agree, especially not in the short term. We’ve seen some statistical and anecdotal evidence over the past few weeks that US consumers are making marginal reductions to gasoline purchases and miles driven. Here’s an example from last month’s MasterCard Advisors gasoline report. And we all know that the price per barrel and the price of a gallon of gasoline hasn’t declined at the same time. If you want further examples, you might want to read this article from last August about the drop in gasoline demand. HMMMM? The $3.23 per gallon back then sounds like a bargain - doesn’t it? Gas demand declined and gas prices increased - that is just not fair!
Lowering demand / consumption in the US is certainly something I’ve been hoping for on both economic and environmental levels. In past posts (last year), I argued that consumers weren’t changing their energy consumption behavior - only the amount of their complaining. That has changed a little bit so I am not saying that now. However, it’s important for Americans and economists to understand that price predictions based upon econometric models may look good on a chart, but that doesn’t mean it will happen.
We could have $4.00 per gallon gasoline even if US consumers drop demand significantly. I wish I could go along with the idea that this is just an oil bubble caused by speculators and it will get better if we would just park all the SUVs, carpool, take mass transit to work, or use many of the available means of reducing energy consumption. I just don’t find that to be a reasonable cause-and-effect promise. Gas prices could stay high or head higher - sorry if I burst that bubble.
If you drive less and gasoline prices hold constant, you will save money by mathematical definition. However, demand destruction is more than a US situation. High oil prices are a result of many factors including failures of US economic fiscal and monetary policy, their effects on a crumbling US dollar, US overconsumption of energy, and US this or US that. One more time, oil is a global product. The highest energy demand growth rates are coming from emerging economies. And this idea of removing subsidies in countries like India and China may sound like a surefire way to immediately drop prices, but I doubt they will be so dramatic (click here for video). Demand destruction in the US means that high prices cause us to drive less, a situation we would survive, if not benefit from. Demand destruction in poorer countries will likely have much more harmful consequences.
Draw all the beautiful supply and demand curves you want. Throw out fancy econ terms like “elasticity of demand” and “demand destruction” every few minutes. Unfortunately, none of those things guarantee that oil or gasoline prices will decline.
This article has 14 comments:
- tom2987
- 11 Comments
Jun 09 06:50 PMThe most recent article from Master Card shows true demand destruction. That is, a fall in the demand of a product. A a significant drope of 1.7 over the same period last year.
The kneejerk answer to this has always been "oh yeah, but the Chinese and Indians eat up that decrease". Wrong. For every percentage drop in US demand, China and India's demand would need to increase 3% (5.1% to make up the most recent us demand destruction). That simply isn't happening. This article also doesn't take into account that the EU is now experiencing slowing demand you'll soon see "demand destruction".
Is your agenda showing, or do I have to wipe Indiana off the list of possible colleges for my children? Economics 101.
Subsidies
The drop in subsidies in several asian countries may not seem like such a bif deal, but when you look at the average household income in those nations, it is substantial.
- pachanguero
- 104 Comments
Jun 09 07:42 PM- icandoitdon
- 363 Comments
Jun 09 09:37 PM- icandoitdon
- 363 Comments
Jun 09 10:13 PMi believe you are correct in your assertion that oil prices could remain inflated in the face of falling demand in the u.s.
u.s. fiscal and monetary policy (not to mention domestic and foreign policy) is as dysfunctional as it gets in my view. our financial system is truly in a shambles (thanks to our fed) and we've made the world wonder about our solvency if not our sanity. with so many classes of financial assets under stress and with real estate in the toilet a lot of the "no confidence" money has gone into commodities as a hedge (oil in particular, which is a consummable resource priced in dollarsthroughout the world) against the dysfunction of what was once the greatest economic power on earth. it is that which could keep oil prices high in the face of collapsing u.s. demand; and investing in a commodity for financial gain, by definition, is a speculative activity. it has nothing to do with end user demand. this type of speculation can go on indefinitely until the reason for the speculation disappears, e.g. more sound fiscal and monetary, and domestic and foreign policy initiatives by the u.s.
if world demand were to collapse because of worldwide recession or decreased demand domestically and internationally, i believe current oil prices would collapse...even with the ongoing dysfunction of the u.s. maybe that's our best hope for lower oil and gasoline prices.
- sickofthehype
- 173 Comments
Jun 10 01:22 AM- paulk8756
- 885 Comments
Jun 10 11:02 AM- paulk8756
- 885 Comments
Jun 10 11:04 AM- Shaggieman
- 56 Comments
Jun 10 11:50 AM- yank
- 86 Comments
My Website
Jun 10 01:00 PMBetter check your facts again. Indeed, China and India gasoline consumption is up 3.7% year to date vs. a 0.7% decline in US consumption. And if demand destruction is working as you say it is why is crude up 40% year-to-date? As for your comment about cuts in subsidies being "substantial"... India's latest price hike in gasoline was 10% vs 40% in Indonesia. Little if any hope of China cutting their subsidies any time soon. So the bottom line is the two most populous countries in the world have combined to cut subsidies 10%. That's a drop in the bucket I'm afraid. Oil prices are headed higher no matter what we do here in the USA. Oil is a "global" commodity and does not give a damn what the USA does.
Yank
- Eric Fox
- 179 Comments
My Website
Jun 10 04:57 PM- tom2987
- 11 Comments
Jun 10 06:04 PMFor all of User's typos, he's right. US's demand is down 1.7 percent according to MasterCard (who I have much more faith in than gov stat), and not the 0.7% you state. Keep in mind those stats are from May and do not take into consideration the most recent substantial increases at the pump. Also please consider it was over memorial day. Because so much more gasoline is used in summer, a 1% drop in summer impacts the entire year up to 5%.
For India, you say it's only 10% which won’t equate to demand destruction. I think the Indians would disagree as they are currently protesting as a result of the increase.. Actually, to put a real number to that 10%, it's actually “only” 13 cents for gas and 8 cents for diesel. But to the 300 million of India's 1.1 billion people live on less then a dollar a day, and the millions of others live on the state-set minimum daily wage of $1.60, that is a substantial increase. It would be the equivalent the price of gas in the US going UP $10.68 a gallon overnight. I’m no genius, but I think that might hurt demand.
- tom2987
- 11 Comments
Jun 10 06:39 PM"The four-week moving average for gasoline demand fell 5.2 percent from last year's levels to 9.163 million barrels per day"
www.reuters.com/articl...
Inventories out tomorrow, if we have a substantial build, on top of this substantial reduced demand, it could get ugly for the speculators.
- jai hanuman
- 5 Comments
Jun 10 09:12 PMLeadership failed to tax oil revenue and use the proceeds to create alternative(solar/wind... technologies.
- jai hanuman
- 5 Comments
Jun 10 09:12 PMLeadership failed to tax oil revenue and use the proceeds to create alternative(solar/wind... technologies.