Demand destruction as a market-balancing mechanism
Professor Katharine Wolfram argued that while demand destruction helps balance oil markets during supply shocks, it places a heavy financial burden on consumers with inelastic demand.
The argument
When supply is constrained (e.g., the closure of the Strait of Hormuz), prices rise until some consumers find alternatives. However, those who cannot substitute (such as daily commuters) are forced to pay higher prices, which crowds out other economic spending.
Hear it yourself
"Global supplies are down, all while oil demand has stayed pretty consistent for now, anyway. We have called Katharine Wolfram to talk it over. She's a professor of energy economics at MIT's Sloan School of Management. We'll talk oil and something called demand destruction here in this ninth week of the war. Professor Wolfram, thanks for being on the program. Thanks so much for having me. At the risk of oversimplifying perhaps, but also in search of clarity, could you use demand destruction in a sentence for me, please? Sure. When the price of a good goes up, then consumers consume less of it."