When could ‘demand destruction’ trigger gas price relief?

CALGARY –

It is said that gasoline is the cure for high prices. However, this may not be true in all cases.

Experts are torn on when or even if drivers might see significant “demand destruction” — an economics term for a sustained decline in demand for a product due to excessively high prices — at the pumps.

The theory is that reaching an unsustainable price would be a tipping point, causing fuel prices to drop and eventually offering drivers some relief. Analysts say we aren’t there yet, even though gas prices remain at all-time highs.

“Canada’s gas prices are at inflation-adjusted records. But I continue to be astonished at the high level of demand we’re seeing,” saidPatrick De Haan, head petroleum analysis for the fuel price tracker service GasBuddy.com.

Since February, when shock waves from the international energy markets caused Russia’s invasion in Ukraine, gasoline prices have been on the rise.

On Thursday, Canada’s average retail price at the pump was 208.5 cents per gallon. This is 76 cents more than the average last year of 132.2 cents a litre. GasBuddy reports that the country reached an all-time high of 210.8 cents per gallon on June 12.

De Haan has good statistics about Canada’s fuel consumption. saidThe gasoline purchases are likely to be comparable to the U.S. where federal data shows that gasoline demand has backed down only about five to ten percent since prices spiked earlier in the year.

He saidIt’s surprising, but it could be due to the lifting of COVID-19 limitations.

De Haan said, “I would have hoped to see more demand destruction in Canada at the $2 per litre mark.” said. “But I think that many Canadians are looking for a better life than their American counterparts. I also think there are more Canadian companies that are going back to a physical office, and that could be a reason why we’re not seeing things fall off more significantly.”

De Haan added he believes it would take prices climbing as high as $2.25 or $2.50 per litre for unleaded fuel — something that’s unlikely, but could happen if a natural disaster or weather event took out a major North American refinery this summer — to trigger “exponential” levels of demand destruction. Diesel fuel recently topped out at $2.50 a litre.

Ian Jack, vice president of public affairs at the Canadian Automobile Association saidThe impact of the current demand destruction is likely to be minor. He said that driving to work is the only way for many Canadians to get there, particularly in rural areas and smaller cities.

“People who drive, by and large, can’t just stop driving,” he said. “So we really see the price spike as only affecting demand at the margins.”

High gas prices may cause a few Canadians to change their summer vacation plans. Jack however, is not one of them. saidMany people will be reluctant if they spend the last two summers at home because of COVID-19.

“Jet fuel and airfares are also on the rise.” That means if you’re looking at doing a summer vacation, I don’t know that deciding not to drive and taking the plane instead is going to save you any money,” he said.

Vijay Muralidharan (managing director of R CUBE Economic Consulting) in Calgary is less optimistic that consumers can sustain the current high prices for long. He believes that there is already significant demand destruction.

“In my analysis, when the average price goes past $1.80 and stays there a while, demand destruction occurs. So it’s already happening in Canada,” he said.

Muralidharan explains why pump prices in this country don’t reflect a decrease in demand. saidIt is because U.S. driver demand remains so high. North American fuel refiners have the choice to sell into the U.S. and Canadian markets. As long as the demand is high south of the border fuel prices in this country will not drop.

Muralidharan says that the U.S. economic performance is the “biggest indicator” to look at when looking for signs of gasoline demand decline. said.

He has been alive until now. saidWhile real U.S. disposable incomes remain high, inflation and recent interest rate increases by the Federal Reserve suggest that consumer purchasing power is about to plummet.

He stated that “real incomes aren’t rising as fast as inflation and (therefore), you will see some pullback in demand.” said. “My prediction: By the end of July, or early August, I believe we will see some type of (gasoline-price) reprieve.”

This report was published by The Canadian Press June 17, 2022.