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There’s a famous saying that ’the cure for high prices is high prices,’ but when it comes to gasoline, that may not necessarily be the case.
Experts are torn on when or even if drivers might see significant "demand destruction" — an economics term for a sustained decline in demand for a product due to excessively high prices — at the pumps.
In theory, reaching an unsustainable price would serve as a tipping point and ultimately cause fuel prices to fall, finally offering drivers some relief. But analysts say we’re not there yet even though gas prices are hovering around all−time highs.
"Canada’s gas prices are at inflation−adjusted records. But I continue to be astonished at the high level of demand we’re seeing," said Patrick De Haan, head of petroleum analysis for the fuel price tracking service GasBuddy.com.
Gasoline prices have been rising since February, ever since Russia’s invasion of Ukraine sent shock waves through international energy markets.
On Thursday, the national average retail price at the pump in Canada was 208.5 cents per litre, a whopping 76 cents higher than last year’s average of 132.2 cents per litre. The country hit an all−time record of 210.8 cents per litre on June 12, according to GasBuddy.
While Canada doesn’t have good statistics on consumer fuel consumption, De Haan said gasoline purchases are likely comparative to the U.S., where federal data shows gasoline demand has backed off only about five to 10 per cent since prices first began to spike earlier this year.
He said that’s surprisingly low, but likely has everything to do with the lifting of COVID−19 restrictions.
"I would have expected to see more demand destruction (in Canada) at the $2 a litre mark," De Haan said. "But I think that many Canadians, similar to their American counterparts, are wanting to get out. I also think there are more Canadian companies that are going back to a physical office, and that could be a reason why we’re not seeing things fall off more significantly.”
De Haan added he believes it would take prices climbing as high as $2.25 or $2.50 per litre for unleaded fuel — something that’s unlikely, but could happen if a natural disaster or weather event took out a major North American refinery this summer — to trigger "exponential" levels of demand destruction. Diesel fuel recently peaked at around $2.50 per litre.
Ian Jack, vice−president of public affairs for the Canadian Automobile Association, said any demand destruction that’s taking place at this point is likely minor. He pointed out that for many Canadians, especially in smaller cities and rural areas, driving is the only way to get to work.
“People who drive, by and large, can’t just stop driving," he said. "So we really see this (price spike) as only affecting 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 be reluctant to if they spent the last two summers staying home because of COVID−19.
"Jet fuel and airfares have gone up as well. That means if you’re looking at doing a summer vacation, I don’t know that deciding not to drive and taking the plane instead is going to save you any money," he said.
However, Vijay Muralidharan, managing director of R CUBE Economic Consulting in Calgary, is less confident that the current high prices can be sustained by consumers for long. In fact, he believes significant demand destruction is happening already.
“In my analysis, when the average price goes past $1.80 and stays there a while, demand destruction occurs. So it’s already happening in Canada,” he said.
The reason that pump prices in this country aren’t yet reflecting a reduction in demand, Muralidharan said, is that U.S. driver demand is still so high. Because North American fuel refiners have the option to sell into either the Canadian or U.S. markets, as long as demand remains high south of the border, fuel prices in this country will remain elevated.
In fact, the performance of the U.S. economy is the "biggest barometer" to pay attention to when watching for early signs of gasoline price demand destruction, Muralidharan said.
Up to now, he said, real U.S. disposable incomes have remained high, but inflation and recent interest rate hikes by the Federal Reserve make it likely that consumer buying power in that country is about to take a dive.
"Real incomes are not rising as fast as inflation, (therefore) you will see some sort of pullback in demand," he said. "My prediction is that by end of July, early August, we will see some sort of (gasoline) price reprieve."
This report by The Canadian Press was first published June 17, 2022.
Comments
It’s like house prices going through the roof: you don’t wonder why the demand, but rather where is the money coming from. It looks as if ‘whatever-the-market-will-bear’ hasn’t yet found its bearings.
Housing be the same: like housing, almost as many Canadians need their cars to get to work (at very least). Again, when one sees holiday makers clogging the ferry system out here to BC, you wonder where THAT money is coming from. (I have rellies who are driving from St John’s all the way to the West Coast—just to bring their hound with them. Man! As friend who drove from ‘only’ Ontario told me: it’s crazy expensive. Still people pay.)
As long as people are willing or compelled to come up with the dough, there’s no market-fundamental which will ameliorate. This is especially tragic in housing terms, yet it’s plain there’s enough money—made, gotten, or borrowed—out there. Uneven distribution: that used to be condemned as commie talk, but the wolf is at the door with the stats that say otherwise. Actually, it’s a sheep that profiteers dressed up like a wolf.
The observation is that the expected tipping-point hasn’t happened, despite looking like it’s been surpassed. Is there better evidence that price-rigging in some form or another is going on, and that governments are allowing it? They surely can’t say they don’t know about it, but they can whimper that the EV market is stimulated by it. It si, of course, but way not enough. Again: the trouble is uneven opportunity to avail alternatives.
It’s still largely up to government to find another tipping point—that which initiates a much more robust transition to EVs. Just like housing, leaving it to market fundamentals is a mug’s game.
We need a robust, longterm (as in never-ending, perfunctory consistency) public housing construction (don’t worry, it’ll all be filled—if all governments do is knee-jerk and inadequate reaction to the poorest citizens’ troubles finding homes, then the remainder thoughtlessly complain its a waste of money. Public housing shouldn’t be reaction, but rather regular policy: housing built for every income level from low to middle) just like we need a more robust public subsidy to help commuters (especially) to switch to EVs.
Dragging the feet is tantamount to allowing tens of thousands of citizens to perish from uneven distribution of deadly, illegally-made fentanyl. Profiteers will always fill a need governments refuse to fill—that’s why they condemn and hobble public investment in public enterprises. That margin is eliminated with concerted, cogent public polices.
Okay? So let’s get on with it.