Thoughts on Demand Destruction
Posted by jeffvail on April 28, 2008 - 10:00am
Where's the Demand Destruction?
Oil is close to $120/barrel, so where’s the demand destruction? The latest EIA figures actually show a 0.57% increase in US gasoline demand year on year over the last week. The week prior also showed an increase in gasoline demand, but the 4-week average still shows a 0.5% decrease because of lower demand in 2008 for the weeks ending 4/4/08 and 3/21/08. Regardless of which statistic one chooses, this is hardly a convincing case for demand destruction. Admittedly, historical demand growth has been near 1.5%, and the per capita gasoline use is slightly lower since the US grew roughly 0.883% last year. At best, this is not significant "demand destruction." Take a look for yourselves: here are the EIA’s full historical tables for gasoline demand, both week ending and 4-week average. With statistics available to show both minor increases or decreases, recent reports in the press and blogosphere consistently publish reports of declining demand. Other articles, also consistent in claiming that we're driving less, rely on entirely different sources: Businessweek recently claimed that "traffic" as measured by the Federal Highway Administration is down 1.4% last year, and MasterCard claims that purchases at the pump are down 6.8% since last year. If EIA statistics are even vaguely accurate, then MasterCard's figure seems untenable--what is happening to all the additional gasoline being purchased? Gasoline stocks are up from a year ago, but nowhere near enough to make up for these discrepancies. And, of course, it is possible that EIA data is off--there are even internal discrepancies in the EIA's reporting, with this week's Weekly Petroleum Status Report highlights (.pdf) claiming that the 4 week average for gasoline demand rose by 0.9% over last year, directly contradicting the EIA's data tables (referenced above) that show a 0.5% decline in the exact same statistic. Amidst this confusion, the consistency of reporting about a decline in gasoline demand seems like cherrypicking.
With this uncertainty surrounding the concept of “demand destruction,” it’s time to take a deeper look at the mechanics behind how demand destruction occurs. Specifically, this essay will limit its focus to two components of demand destruction in gasoline: the time-lag between high prices and reduced demand, and the need to price alternatives to each gallon of gasoline we consume. Does a lack of demand destruction when oil is well over $110/barrel mean that prices must go even higher to destroy demand? How much higher? Or is it enough that prices hold at this level for long enough to cause people to gradually make long-term purchases with this price in mind, and thereby destroy demand? How long? Finally, how much of current US demand destruction (to whatever degree it exists—even if only as a decrease in growth of demand) is due to current economic conditions, and how much can be attributed directly to the price of oil?
There's more… (1777 words)
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