CALGARI –
There is a saying that “the cure for high prices is high prices”, but when it comes to petrol, this may not be the case.
Experts are annoyed when or even whether drivers can see a significant “demand devastation” – an economic term for a sustained decline in demand for a product due to excessive prices – of pumps.
In theory, reaching an unsustainable price would serve as a turning point and would ultimately lead to lower fuel prices, which would ultimately offer drivers some relief. But analysts say we are not there yet, although gas prices are hovering around all-time highs.
“Canada’s gas prices are in inflation-adjusted highs. But I’m still amazed at the high level of demand we’re seeing,” said Patrick De Haan, head of oil analysis for the GasBuddy.com fuel price tracking service. .
Gasoline prices have been rising since February, when Russia’s invasion of Ukraine sparked shockwaves in international energy markets.
On Thursday, the average national retail price of a pump in Canada was 208.5 cents per liter, an incredible 76 cents higher than last year’s average of 132.2 cents per liter. The country reached an all-time record of 210.8 cents per liter on June 12, according to GasBuddy.
Although Canada does not have good statistics on fuel consumption for consumers, De Haan said gasoline purchases are likely comparable to those in the United States, where federal data shows that demand for gasoline has fallen by only about 5 to 10 percent since prices they first started growing earlier this year.
He said it was surprisingly low, but probably had something to do with lifting restrictions on COVID-19.
“I would expect to see more destruction of demand (in Canada) at $ 2 a liter,” De Haan said. “But I think a lot of Canadians, like their American counterparts, want to go out. I also think that there are more Canadian companies that are returning to a physical office, and that may be the reason why we don’t see things falling more significantly. “
De Haan added that he believes prices of up to $ 2.25 or $ 2.50 per liter for unleaded fuel will be needed – something that is unlikely but could happen if a natural disaster or weather affects a large refinery in North America this summer – to cause “exponential” levels of demand destruction. Diesel fuel recently peaked at around $ 2.50 per liter.
Ian Jack, vice president of public affairs for the Canadian Automobile Association, said any destruction of demand that is happening at the moment is likely to be insignificant. 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 in general can’t just stop driving,” he said. “So we really see this (price jump) as just an impact on margin demand.”
While few Canadians may change their summer vacation plans due to high gas prices, Jack said many would be reluctant to do so if they spent the last two summers at home because of COVID-19.
“Fuel for airplanes and plane tickets has also risen. This means that if you want to go on summer vacation, I don’t know that if you decide not to drive and take the plane instead, it will save you 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 maintained by consumers for a long time. In fact, he believes that there is already a significant destruction of demand.
“In my analysis, when the average price exceeds $ 1.80 and stays there for a while, demand is destroyed. So this is already happening in Canada, “he said.
The reason why pump prices in this country still do not reflect declining demand, Muralidharan said, is that demand for drivers in the United States is still so high. As North American fuel refineries have the opportunity to sell on the Canadian or American market, while demand remains high south of the border, fuel prices in that country will remain high.
In fact, the performance of the US economy is the “biggest barometer” to look out for when there are early signs of a drop in gasoline demand, Muralidharan said.
So far, he said, real disposable incomes in the United States remain high, but inflation and recent increases in Federal Reserve interest rates are likely to reduce the purchasing power of consumers in that country.
“Real incomes are not growing as fast as inflation, (therefore) you will see some withdrawal in demand,” he said. “My forecast is that by the end of July, the beginning of August we will see some postponement of the price of (petrol).
This report by The Canadian Press was first published on June 17, 2022.
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