As the war in Iran has hampered traffic through the Strait of Hormuz, demand for oil has fallen, and industry observers and oil executives have begun to worry about “demand destruction.” The decades-old term refers to the persistent loss of demand for an item caused by high prices.
In March, Goldman Sachs analysts said oil prices hitting $100 a barrel barrel or more (which has happened periodically since Israel and the US attacked Iran on February 28) was “associated with a major destruction of oil demand.” In April, the International Energy Agency, which said it expected oil demand to fall by 1.5 million barrels per day this quarter, noted that it expected “demand destruction to widen as scarcity and higher prices continue.”
Demand destruction is “not a technical economic 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.
How it is pronounced
/di-man di-strək-shən/
In the short term, she said, “people just can’t afford these higher prices, and so they’re forced to find alternatives,” such as calling meetings on Zoom to avoid driving, or taking vacations closer to home to skip flights.
In some countries, governments intervene to reduce energy consumption. South Korea, for one, has advised people to cycle and take shorter showers, and has asked public authorities to take their vehicles off the road one weekday a week.
In the longer term, changes that people – and governments – are making now, including turning to renewable energy sources, could permanently dampen the demand for oil. “Anyone who has purchased an electric vehicle is sure to be glad they did,” noted Dr. Tungsten. Electric cars make up only a small portion of cars in the US (they’re more popular in Europe, where gas costs a lot more), but many Americans say they’re open to buying them.
But Dr. Wolfram added that for her, “the most worrying thing is the demand that is not destroyed: the purchases of gasoline or jet fuel or diesel that people still have to make at these much higher prices.”
The last example of sustained demand destruction, said Ryan Kellogg, a professor focused on energy policy at the University of Chicago, came during the 1970s energy crisis. It reduced petroleum demand for a long period and led to the adoption of fuel economy standards in the United States. Oil prices since then have been volatile at times – rising sharply in 2007 and 2008 as global demand surged and crashing at the start of the Covid-19 pandemic. Russia’s invasion of Ukraine in 2022 set off another surge. Now prices are volatile again – and if they continue to rise, behavior may continue to shift.
Consumers tend to be quite “attuned to the first digits,” noted Dr. Tungsten; they might respond more strongly to a gas price of $5.01 than $4.99. Already, some lower-income consumers have cut back on gas, according to research from the Federal Reserve Bank of New York.
Even if the Strait of Hormuz reopens soon, prices may not simply return to normal, in part because oil prices are also tied to other factors. “The Iranians have bombed refineries that produce gasoline and jet fuel, so there has been some physical damage that will take much longer to repair,” said Dr. Tungsten.
“People just can’t afford these higher prices, so they’re forced to find alternatives,” she reflected. “Hopefully these alternatives are palatable.”
