When you hear the term “demand destruction”, it’s typically followed immediately with a claim that prices will decline with it. Many economists and financial experts make this assumption. I don’t agree, especially not in the short term. We’ve seen some statistical and anecdotal evidence over the past few weeks that US consumers are making marginal reductions to gasoline purchases and miles driven. Here’s an example from last month’s MasterCard Advisors gasoline report. And we all know that the price per barrel and the price of a gallon of gasoline hasn’t declined at the same time. If you want further examples, you might want to read this article from last August about the drop in gasoline demand. HMMMM? The $3.23 per gallon back then sounds like a bargain - doesn’t it? Gas demand declined and gas prices increased - that is just not fair!

Lowering demand / consumption in the US is certainly something I’ve been hoping for on both economic and environmental levels. In past posts (last year), I argued that consumers weren’t changing their energy consumption behavior - only the amount of their complaining. That has changed a little bit so I am not saying that now. However, it’s important for Americans and economists to understand that price predictions based upon econometric models may look good on a chart, but that doesn’t mean it will happen.

We could have $4.00 per gallon gasoline even if US consumers drop demand significantly. I wish I could go along with the idea that this is just an oil bubble caused by speculators and it will get better if we would just park all the SUVs, carpool, take mass transit to work, or use many of the available means of reducing energy consumption. I just don’t find that to be a reasonable cause-and-effect promise. Gas prices could stay high or head higher - sorry if I burst that bubble.

If you drive less and gasoline prices hold constant, you will save money by mathematical definition. However, demand destruction is more than a US situation. High oil prices are a result of many factors including failures of US economic fiscal and monetary policy, their effects on a crumbling US dollar, US overconsumption of energy, and US this or US that. One more time, oil is a global product. The highest energy demand growth rates are coming from emerging economies. And this idea of removing subsidies in countries like India and China may sound like a surefire way to immediately drop prices, but I doubt they will be so dramatic (click here for video). Demand destruction in the US means that high prices cause us to drive less, a situation we would survive, if not benefit from. Demand destruction in poorer countries will likely have much more harmful consequences.

Draw all the beautiful supply and demand curves you want. Throw out fancy econ terms like “elasticity of demand” and “demand destruction” every few minutes. Unfortunately, none of those things guarantee that oil or gasoline prices will decline.