High gasoline prices |  Towards “demand destruction”?

High gasoline prices | Towards “demand destruction”?

(Calgary) There’s a famous saying that “the cure for high prices is high prices,” but when it comes to gasoline, that’s not necessarily the case.

Posted at 9:00 am

amanda stephenson
the canadian press

Experts can’t say when, or even if, drivers will see significant “demand destruction” at the pump. Demand destruction is a sustained decline in demand for a product due to excessively high prices.

In theory, hitting an unsustainable price would serve as a tipping point and ultimately lower fuel prices, offering some relief to drivers. But analysts say we’re not there yet, even as gasoline prices hover around record highs.

“Gasoline prices in Canada are at inflation-adjusted records,” said Patrick De Haan, head of oil analysis for fuel price tracking service GasBuddy.com. “But I continue to be amazed at the high level of demand we are seeing. »

Gasoline prices have been rising since February, when the Russian invasion of Ukraine shocked international energy markets.

Although Canada doesn’t have good statistics on consumer fuel consumption, de Haan said gasoline purchases in the country were likely comparable to those in the United States, where federal data shows gasoline demand has only fallen between 5% and 10% since prices began to rise. upload earlier this year.

“I would have expected to see more demand destruction [au Canada] at the $2 a liter mark,” De Haan said.

But I think a lot of Canadians, like Americans, want out. I also think there are more Canadian companies going back to a physical office, and that might be one of the reasons why we don’t see things falling off more sharply.

Patrick De Haan, head of oil analysis for fuel price tracking service GasBuddy.com

Mr. de Haan added that he believed prices would have to rise to $2.25 or $2.50 per liter of unleaded fuel, which is unlikely but could happen if a major oil refinery is destroyed by a natural disaster or weather event. North America during the summer, to trigger “exponential.” levels of demand destruction. Diesel fuel has recently peaked at around $2.50 per litre.

Ian Jack, vice president of public affairs for the Canadian Automobile Association, said any demand destruction that occurs at this point is likely to be minor. He pointed out that for many Canadians, especially in small towns and rural areas, the car is the only way to get to work.

“People who drive, in general, can’t just stop driving,” he stressed.

unavoidable destruction

However, Vijay Muralidharan, managing director of R CUBE Economic Consulting in Calgary, is less confident that consumers can sustain today’s high prices for long. In fact, he believes significant demand destruction is already underway.

According to my analysis, when the average price rises above $1.80 and stays there for a while, there is demand destruction. So this is already happening in Canada.

Vijay Muralidharan, Managing Director of R CUBE Economic Consulting

The reason pump prices have not yet reflected a reduction in demand is because demand from US drivers remains very high, Muralidharan said. Since North American fuel refiners have the option of selling into the Canadian or US markets, as long as demand remains high south of the border, fuel prices in that country will remain high.

In fact, the performance of the US economy is the “biggest barometer” to pay attention to when seeing the first signs of demand destruction in gasoline prices, Muralidharan said.

So far, he said, real disposable income in the United States has remained high, but inflation and recent interest rate hikes make it likely that the purchasing power of consumers in this country is about to plummet. “My prediction is that at the end of July, beginning of August, we will see some kind of respite in prices. [de l’essence]. »

#High #gasoline #prices #demand #destruction

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