Yes, HIGH PRICES HAVE THEIR OWN SOLUTION, and it is called ‘demand destruction’.
When prices soar, what do people do? They tend to buy less. And buying less contains its own type of toxic response.
A senior executive at Vitol Group, a major energy and commodities trader told people in a conference last weekend that there is “very clear evidence out there of economic stress being caused by the high prices, what some people refer to as demand destruction…not just oil, but also liquefied natural gas”.
Demand destruction can happen in any market from candies to corn. If the price rises beyond the ability and/or willingness of people to pay, then demand will drop and that demand will be destroyed.
That may not represent much of threat in many cases except perhaps to the profit margins of candy makers, but when it comes to such a basic commodity as crude oil and its derivatives, demand destruction could help tilt an economy away from expansion into sluggishness. All industries from agriculture to aircraft are heavily reliant on crude oil and if the cost of gasoline, diesel, and jet fuel gets too high the tractors, fertilizers, and jet planes may work less or push higher prices in their own supply chains to stay afloat.
Demand destruction can have knock-on effects in all kinds of unexpected ways; consequently, Germany has just reported its first monthly trade deficit in three decades! Their report expressed it had imported more than it has exported as German companies saw the softening of demand for their products.
DEMAND DESTRUCTION does not serve well any economy – as you can see that the clue is in the name!