There is an old saying in the world’s financial institutions that “nothing cures high prices like high prices,” and it certainly seems as true today as in the 1970s.
According to the OECD, oil demand in Western countries is set for its biggest fall in 25 years as the global economic slowdown intensifies and consumers respond to high prices.
In America, for example, the Transportation Department announced this week that Americans drove 4.7 per cent, or 12.2 billion, fewer miles in June compared with a year earlier. That’s a lot of gasoline saved. More significantly, it was the eighth consecutive monthly fall.
As consumers all over respond by driving less, and downsizing their cars world oil consumption is now growing at a significantly lower pace than had been imagined a year ago.
Moreover the Olympics is also having an effect on world oil prices as China’s decision to shut down large swaths of its industry during the Olympics to help to cut air pollution will also reduce oil demand.
So Americans can thank Michael Phelps not just for winning so many gold medals, but, also for in part reducing what they pay at the pump.
The only problem for consumers is that it won’t last. Whilst the coming recession will keep prices low for a while, all the indications are for the long-term going to be up.
Governments should also learn the lessons of the high oil prices over the Summer and be bold about disinvestment programmes out of oil, heavily promoting renewables and efficiency instead. Because what goes down, goes back up…