(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 a.m.
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 historic 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 Russia’s invasion of Ukraine sent shockwaves through 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 that demand gasoline has only fallen about 5-10% since prices started to climb earlier this year.
“I would have expected to see more demand destruction [au Canada] at the $2 per liter mark,” said De Haan.
But I think many Canadians, like Americans, want to get out. I also think there are more Canadian companies returning to a physical office, and that might be one reason why we don’t see things falling 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 need to rise to $2.25 or $2.50 a liter for unleaded fuel – which is unlikely but could happen if a natural disaster or weather event destroyed a major North American refinery during the summer – 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, especially in small towns and rural areas, the car is the only way to get to work.
“People who drive, as a whole, can’t just stop driving,” he stressed.
Inevitable destruction
Vijay Muralidharan, managing director of R CUBE Economic Consulting in Calgary, is less confident, however, that the current high prices can be sustained by consumers for long. In fact, he believes significant demand destruction is already underway.
According to my analysis, when the average price goes 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 there are not yet reflecting a reduction in demand is because demand from U.S. drivers is still so 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 watching for the first signs of demand destruction in gasoline prices, Muralidharan said.
So far, he said, real disposable incomes in the United States have remained high, but inflation and recent interest rate hikes make it likely that the purchasing power of consumers in this country is about to take a dive. “My prediction is that by the end of July, beginning of August, we will see some sort of respite in prices [de l’essence]. »