High gasoline prices | Towards “demand annihilation”?

(Calgary) There’s a famous saying that “high prices are the cure for 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 “needs wasting” at the pump. Demand annihilation is a sustained decrease in demand for a product due to over-pricing.

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

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

Gasoline prices have been rising since February, when Russia’s invasion of Ukraine sent shockwaves through international energy markets.

Although Canada doesn’t have good statistics on consumer fuel use, De Haan said gasoline purchases in the country are likely comparable to those in the United States, where federal data shows gasoline demand has fallen only about 5-10% since prices began climbing earlier this year.

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

But I think a lot of Canadians want out like the Americans. I also think there are more Canadian companies returning to a physical office, and that might be one reason why we’re not seeing things fall more sharply.

Patrick De Haan, Head of Oil Analysis at fuel price tracking service GasBuddy.com

Mr De Haan added that he believed unleaded gasoline prices would need to rise to $2.25 or $2.50 a liter – which is unlikely but could happen if a natural disaster or summer weather event hit a major North American refinery destroyed – to trigger “exponential”. levels of demand destruction. Diesel fuel has recently peaked at around $2.50 per liter.

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, particularly in small towns and rural areas, the only way to get to work is by car.

“People who drive overall can’t just stop driving,” he said.

Inevitable Destruction

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

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

Vijay Muralidharan, Managing Director of R CUBE Economic Consulting

The reason pump prices there aren’t reflecting a fall in demand yet is because demand from US drivers is still so high, Muralidharan said. Because North American fuel refiners have the option to sell in the Canadian or US market, fuel prices in that country will remain high as long as demand remains high south of the border.

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

So far, real disposable incomes in the United States have remained high, but inflation and recent interest rate hikes make it likely that consumer purchasing power in the country will soon fall. “My prediction is that by the end of July, early August we will see some kind of price recovery [de l’essence]. »

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