Word of the Day: Demand Destruction
High prices for something can lead to permanent decrease in its demand.
Demand Destruction
noun
from Wikipedia
Demand destruction is a permanent downward shift on the demand curve in the direction of lower demand of a commodity, such as energy products, induced by a prolonged period of high prices or constrained supply. In the context of the oil industry, “demand” generally refers to the quantity consumed (see for example the output of any major industry organization such as the International Energy Agency), rather than any measure of a demand curve as used in mainstream economics.
In economics, demand destruction refers to a permanent or sustained decline in the demand for a certain good in response to persistent high prices or limited supply. Because of persistent high prices, consumers may decide that it is not worth purchasing as much of that good, or seek out alternatives as substitutes.
See as the opposite (or complement?) of Jevons Paradox.
From the newshole:
As the war in Iran has stymied traffic through the Strait of Hormuz, demand for oil has fallen, and industry watchers and oil executives have started to fret about “demand destruction.” The decades-old term refers to the sustained loss of demand for a commodity caused by high prices.
In March, Goldman Sachs analysts said that oil prices hitting $100 a barrel or more (which has happened periodically since Israel and the United States attacked Iran on Feb. 28) was “associated with more significant oil demand destruction.” In April, the International Energy Agency, which said it expected oil demand to shrink by 1.5 million barrels per day this quarter, noted that it anticipated that “demand destruction will spread as scarcity and higher prices persist.”
Demand destruction is “not a technical economics term,” said Catherine Wolfram, a professor of energy economics at the Massachusetts Institute of Technology’s Sloan School of Management. She has seen it used among oil market traders and those on the financial side of the industry.
In the short term, she said, “people just can’t afford these higher prices, and so are being forced to find alternatives,” such as calling into meetings on Zoom to avoid driving, or taking vacations closer to home to skip plane travel.
In some countries, governments are intervening to reduce energy usage. South Korea, for one, has advised people to ride bicycles and take shorter showers, and has told government agencies to take their vehicles off the road one workday per week.
In the longer term, changes that people — and governments — make now, including turning to renewable energy sources, may permanently dampen demand for oil. “Anyone who bought an electric vehicle is definitely happy to have done so,” Dr. Wolfram noted. E. V.s make up only a small portion of cars in the United States (they’re more popular in Europe, where gas costs much more), but many Americans say they are open to buying them.
But Dr. Wolfram added that, to her, “the most worrying thing is the demand that’s not destroyed: the purchases of gasoline or jet fuel or diesel that people still have to make at these much higher prices.”
| Lora Kelley, As Oil Prices Spike, Talk of ‘Demand Destruction’ Sets In