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Category: Glint's Helpful Hints

Glint’s Helpful Hints: High prices have their own solution

And it's called 'demand destruction'. When prices soar, what do people do? They tend to buy less. And buying less contains its own type of toxin. A...

7 July 2022

Gary Mead

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And it’s called ‘demand destruction’. When prices soar, what do people do? They tend to buy less. And buying less contains its own type of toxin.

A senior executive at Vitol Group, a major energy and commodities trader, told 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, 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, jet fuel gets too high the tractors, fertilizers, 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. Germany has just reported its first monthly trade deficit (it imported more than it exported in May) in three decades, as German companies saw softening demand for their products.

Demand destruction isn’t good for an economy – the clue is in the name.

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