NEW YORK — Soaring gas prices have left many consumers with no choice but to cut back on non-essential spending, but the circle could be closed by preventing some drivers from filling up.
This “demand destruction” occurs when consistently high prices cause demand to fall. It’s an unfortunate sign, as consumers are facing the highest inflation in four decades with no relief in sight.
Data from the Energy Information Administration shows demand in recent months is already 3% behind the same time a year ago, according to the week.
The persistent rise in inflation is putting increasing pressure on consumers. Their spending has held up for most of 2021 and into 2022, seemingly unaffected by rising prices for everything from food to clothes. But Russia’s invasion of Ukraine in February worsened already high energy prices. Russia is a top crude producer, and sanctions on the nation have cut off its production from much of the world’s oil supply.
US crude oil prices have risen more than 60% this year. That took gasoline prices to historic highs, averaging $6.46 in Los Angeles and $5.20 in New York.
“A lot of people could make minor lifestyle changes,” said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research. “What you end up doing instead is you end up spending less on other things that are discretionary.”
Gasoline, however, is considered essential for most people who rely on their car to get around. Slowing demand threatens a wide range of businesses that are counting on a summer upturn in activity as Americans go on vacations, take road trips and generally hit the road in greater numbers for a wide range of activities. Lower gas consumption could signal a worsening recovery outlook for restaurants, hotels and other businesses still struggling to regain financial ground lost during the pandemic.
The AAA reports that 75% of drivers surveyed said they would change their driving habits if gas reached $5 a gallon.
Prices at the pump are not expected to drop anytime soon as oil production is lagging. The United States is the world’s largest oil producer, but its refining capacity is down 900,000 barrels of oil a day since late 2019, according to the Department of Energy.