CALGARY –
There is a famous saying that “the cure for high prices is high prices,” but when it comes to gasoline, it may not necessarily be so.
Experts face when or even if drivers could see significant “destruction of demand”, an economic term for a sustained decline in demand for a product due to excessively high prices, in the pumps .
In theory, achieving an unsustainable price would serve as a turning point and ultimately cause fuel prices to fall, eventually offering some relief to drivers. But analysts say we’re not there yet, even though gas prices are hitting record highs.
“Gas prices in Canada are on inflation-adjusted records. But I’m still amazed at the high level of demand we’re seeing,” said Patrick De Haan, head of oil analysis at the Fuel Price Monitoring Service. GasBuddy.com.
Gasoline prices have risen since February, when the Russian invasion of Ukraine sparked shock waves in international energy markets.
On Thursday, the average national retail price at the pump in Canada was 208.5 cents per liter, 76 cents more than last year’s average of 132.2 cents per liter. The country hit a record high of 210.8 cents per liter on June 12, according to GasBuddy.
While Canada does not have good statistics on consumer fuel consumption, De Haan said gasoline purchases are likely to be compared to the United States, where federal data show that gasoline demand has only declined between 5 and 10% since prices began to rise earlier this year. .
He said it’s surprisingly low, but it probably has everything to do with lifting COVID-19 restrictions.
“I would have expected to see more destruction of demand (in Canada) at $ 2 per liter,” De Haan said. “But I think a lot of Canadians, like their American counterparts, want to go out. I also think there are more Canadian companies going back to a physical office, and that could be a reason we’re not seeing things. They’re falling more significant “.
De Haan added that he believes prices should go up to $ 2.25 or $ 2.50 per liter for unleaded fuel, which is unlikely but could happen if it is a natural disaster or a weather event. destroy a major U.S. refinery this summer, to trigger an “exponential.” “Destruction levels in demand. Diesel fuel peaked recently at around $ 2.50 per liter.
Ian Jack, vice president of public affairs for the Canadian Automobile Association, said any demand for destruction that is currently taking place is likely to be less. He noted that for many Canadians, especially in smaller cities and rural areas, driving is the only way to get to work.
“People who drive, in general, can’t stop driving,” he said. “So we really see that this (the price increase) only affects demand on the margins.”
While a small number of Canadians may change their summer vacation plans due to high gas prices, Jack said many will resist if they spend the last two summers staying home due to the COVID-19.
“Aircraft fuel and plane tickets have also gone up. That means if you’re thinking about taking a summer vacation, I don’t know that deciding not to drive and take the plane will save you money,” he said. . .
However, Vijay Muralidharan, CEO of R CUBE Economic Consulting in Calgary, is less confident that current high prices can be maintained for a long time by consumers. In fact, he believes that there is already a significant destruction of demand.
“According to my analysis, when the average price exceeds $ 1.80 and stays for a while, demand is destroyed. So it’s already happening in Canada,” he said.
The reason bomb prices in this country do not yet reflect a reduction in demand, Muralidharan said, is that demand for U.S. drivers is still so high. Because U.S. fuel refineries have the option to sell in the Canadian or U.S. market, as long as demand remains high south of the border, fuel prices in that country will remain high.
In fact, the performance of the U.S. economy is the “biggest barometer” to watch out for when the first signs of destruction in gasoline price demand are observed, Muralidharan said.
So far, he said, real U.S. disposable income has remained high, but inflation and recent interest rate hikes by the Federal Reserve make it likely that consumers’ purchasing power will be high. country is about to go down.
“Real revenue isn’t rising as fast as inflation, (so) you’ll see some kind of decline in demand,” he said. “My prediction is that in late July, early August, we will see some kind of price reduction (of gasoline).
This report from The Canadian Press was first published on June 17, 2022.