Demand destruction
Encyclopedia
Demand destruction is an economic
term used to describe a permanent downward shift in the demand curve
in the direction of lower demand of a commodity such as energy product
s, induced by a prolonged period of high prices or constrained supply.
In the context of the oil
industry, "demand" generally refers to the quantity consumed (see for example the output of any major industry organization such as the International Energy Agency
), rather than any measure of a demand curve as used in mainstream economics
.
The term has come to some prominence lately as a result of the growing interest in the peak oil theory, where demand destruction is the reduction of demand for oil and oil-derived products. The term is used by Matthew Simmons
, Mike Ruppert and other prominent proponents of the theory. It is also used in other resource
industries such as mining
.
A familiar illustration of demand destruction is the effect of high gasoline price
s on automobile sales. It has been widely observed that when gasoline prices are high enough, consumers tend to begin buying smaller and more efficient cars, gradually reducing per-capita demand for gasoline. If the price rise were caused by a temporary lack of supply, and the price then subsequently goes back down as supply returns to normal, the quantity consumed in this case does not immediately go back to its previous level, since the smaller cars that had been sold remain in the fleet for some time. Demand thereby has been "destroyed"; the demand curve has shifted.
The expectation of future prices and their long-term maintenance at non-economic levels for a certain quantity of consumption also affects vehicle decisions. If the price of fuel is so high that marginal consumers cannot afford to do the same mileage without switching to a more efficient car, then they are forced to sell the less efficient one. A glut of such vehicles causes the used market value to fall, which then increases the depreciation expected of a new vehicle, which increases the total cost of ownership of such vehicles, making them less popular.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
term used to describe a permanent downward shift in the demand curve
Demand curve
In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule...
in the direction of lower demand of a commodity such as energy product
Energy industry
The energy industry is the totality of all of the industries involved in the production and sale of energy, including fuel extraction, manufacturing, refining and distribution...
s, induced by a prolonged period of high prices or constrained supply.
In the context of the oil
Oil
An oil is any substance that is liquid at ambient temperatures and does not mix with water but may mix with other oils and organic solvents. This general definition includes vegetable oils, volatile essential oils, petrochemical oils, and synthetic oils....
industry, "demand" generally refers to the quantity consumed (see for example the output of any major industry organization such as the International Energy Agency
International Energy Agency
The International Energy Agency is a Paris-based autonomous intergovernmental organization established in the framework of the Organisation for Economic Co-operation and Development in 1974 in the wake of the 1973 oil crisis...
), rather than any measure of a demand curve as used in mainstream economics
Mainstream economics
Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...
.
The term has come to some prominence lately as a result of the growing interest in the peak oil theory, where demand destruction is the reduction of demand for oil and oil-derived products. The term is used by Matthew Simmons
Matthew Simmons
Matthew Roy Simmons was founder and chairman emeritus of Simmons & Company International, and was a prominent advocate of peak oil. Simmons was motivated by the 1973 energy crisis to create an investment banking firm catering to oil companies. In his previous capacity, he served as energy...
, Mike Ruppert and other prominent proponents of the theory. It is also used in other resource
Resource
A resource is a source or supply from which benefit is produced, typically of limited availability.Resource may also refer to:* Resource , substances or objects required by a biological organism for normal maintenance, growth, and reproduction...
industries such as mining
Mining
Mining is the extraction of valuable minerals or other geological materials from the earth, from an ore body, vein or seam. The term also includes the removal of soil. Materials recovered by mining include base metals, precious metals, iron, uranium, coal, diamonds, limestone, oil shale, rock...
.
A familiar illustration of demand destruction is the effect of high gasoline price
Price of petroleum
The price of petroleum as quoted in news generally refers to the spot price per barrel of either WTI/light crude as traded on the New York Mercantile Exchange for delivery at Cushing, Oklahoma, or of Brent as traded on the Intercontinental Exchange for delivery at Sullom Voe.The price...
s on automobile sales. It has been widely observed that when gasoline prices are high enough, consumers tend to begin buying smaller and more efficient cars, gradually reducing per-capita demand for gasoline. If the price rise were caused by a temporary lack of supply, and the price then subsequently goes back down as supply returns to normal, the quantity consumed in this case does not immediately go back to its previous level, since the smaller cars that had been sold remain in the fleet for some time. Demand thereby has been "destroyed"; the demand curve has shifted.
The expectation of future prices and their long-term maintenance at non-economic levels for a certain quantity of consumption also affects vehicle decisions. If the price of fuel is so high that marginal consumers cannot afford to do the same mileage without switching to a more efficient car, then they are forced to sell the less efficient one. A glut of such vehicles causes the used market value to fall, which then increases the depreciation expected of a new vehicle, which increases the total cost of ownership of such vehicles, making them less popular.
See also
- Oil price increases since 2003
- Population growthPopulation growthPopulation growth is the change in a population over time, and can be quantified as the change in the number of individuals of any species in a population using "per unit time" for measurement....
- Supply and demandSupply and demandSupply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...