DEMAND DESTRUCTION

Thursday August 31st, AD2006

For millennia the pricing mechanism has been in operation. It has demonstrated to us the very basic principle of supply/demand pricing;high supply and low demand will lead to lower prices. Alternatively, low supply and high demand will drive prices higher. 

The last few years have seen oil prices move significantly higher as global demand has continued to grow and production has remained steady. 

Along the way many economists predicted that $40, $50, $60, or $70 oil would slow demand, so far no evidence points to that being the case. Several years into the current energy bull market has also proved that global supply isn't increasing. 

Conclusion so far? Higher prices are not reducing demand or increasing supply. For example, a  June 10th, 2005 story in EuroNews titled, "Airline Industry Blames Oil Prices for Projected Losses" said, "More and more people were flying last year, and the more people flew, the more money the airlines lost." Air travel in 2006 has been above 2005 levels. Flying is becoming more difficult, costing more and airlines losing even more money. 

In recent times, commentators are increasingly speculating about the potential implementation of "measures" to force a reduction in energy demand. 

In a recent article, Michael Ruppert raised some of these issues in what he calls 'demand destruction'. 

"On larger scale however, demand destruction, as recognized by groups as powerful as the  Council on Foreign Relations is seen as the only way to deal with Peak Oil when supply cannot be increased. Demand must be destroyed in order to:
Protect the markets, Maintain consumer confidence and hide truth of Peak Oil, and Keep some kind of order in the world economy and energy supply system." 

"One other fact needs considering, and this is perfectly in line with what experts like Matthew Simmons have been saying for years. Demand isn't going to slow down until oil hits well over $100 a barrel. The facts are bearing this out."

In his article Ruppert goes on to ponder what many others are starting to ask; what events now and in the future will be used to force demand destruction? 

Ruppert points out that the recent terrorist plot to blow up ten airliners bound from the UK to the US over the Atlantic led to the cancellation of over 800 flights. 

Just one week prior British Petroleum announced that one of its major pipelines from Prudhoe Bay had to be shut down due to corrosion, eliminating the equivalent of 8% of the US oil supply. "With global demand growing past 85 million barrels per day (Mbpd), by some estimates then the removal of 8% of the US supply has had disastrous effects. Oil is a fungible. Any loss of any supply anywhere impacts global markets, not just the country of incident."

"Perhaps hundreds of thousands of would-be travelers have decided not to fly in light of the ridiculous new security procedures. Hence, demand destruction that's going to last for some time. CNN and the BBC were quick to tag every news announcement with the observation that "aside from the stocks of the airlines involved, the markets have been remarkably unaffected." 

"That, after all, is what demand destruction is all about", finishes Ruppert. Whether Ruppert's theory of a link between the Prudhoe Bay pipeline and the alleged terrorist plots is true, we are likely to never know. 

One thing for which we can be certain, the age-old pricing mechanism principle will continue to apply to energy. The higher the demand and lower the supply, the higher prices will reach. In the long-term, vastly higher energy prices will undermine an already ailing global economy. If 
supply cannot be brought up to demand, then either alternatives must be found or demand reduced. 

The real question may be; can alternatives be found in time, or demand reduced in an orderly fashion or will our leaders resort to a more violent form of 'demand destruction'?

As Individuals - our job is to equip ourselves with the knowledge that will help us survive and prosper in our changing world. At Daily Dig - our job is to dig up the relevant information that will provide you, our valued readers, with this knowledge.

Sincerely - Philip Judge pjudge@anglofareast.com