‘Demand destruction’ (i.e., a slump) may prick oil bubble

The evidence is growing stronger that the global shortage of oil isn’t about to be relieved by anything dramatic on the supply side, which leaves an ugly alternative.

In the financial world, they call it “demand destruction.” We can just use plain English and call it a widening global economic slump.
The idea is this: if the price of oil rises too much, it squeezes both consumer spending and business profits, crushing economic growth. Then demand falls.

But since oil consumption hasn’t dropped even with a serious slowdown in the world’s biggest consumer, the U.S., it becomes increasingly likely that continuing price hikes will cause the U.S. slowdown to deepen and spread to other countries.

“You’re starting to seriously question how strong the world economy can be” under these conditions, says economic forecaster Aron Gampel at the Bank of Nova Scotia. After all, he notes, the price of oil isn’t just moving up, it’s “gapping,” or rising in large leaps.

Even as Gampel acknowledges the role of speculative pressure on oil, he and his colleague, commodity specialist Patricia Mohr, have come to the view that the world faces such an intractable squeeze on oil supply that prices are unlikely to drop much until we see lower demand.

Montreal Gazette