Today Online 14 Jun 08;
DEMAND destruction is a neat concept.
It is a fancy economic term for what happens when the price of a commodity gets absurdly high. Once the price accelerates far beyond the fundamentals, users can no longer afford the cost. They look for ways to conserve and cut back on usage. This destroys demand for the commodity, and prices collapse.
First coined by economists to predict the likely breaking point in oil demand, it can apply to virtually any product. It has fashionably become the consumers’ weapon of choice.
Take oil. A few had speculated that the recent high of US$139.12 per barrel would be the trigger. Others pontificate that US$150 would be the ultimate demand destruction for oil. At that price, many economies would struggle. The global airlines industry, already highly distressed, would likely implode. Trucking businesses and the transport industry as a whole would convulse with pain.
Let’s stretch the argument. Demand destruction can also apply to a whole lot of other things. The 90-cent roti prata — the price charged at some Jalan Kayu outlets — must also be close to demand destruction. At $1 per prata, some would be encouraged to find alternatives, and $1.20 would probably spell the end of the craving for many.
To be sure, roti prata could cost $1.50in several years, but it would be under adifferent economic cycle and the cumulativeinflationary pressures then are likely toset the stage for the next wave. Just like the 20-cent prata, 5-cent curry puff,30-cent kolo mee, 20-cent mee rebus many decades before were victims of relentless economic and inflationary surges.
The thing about demand destruction is that as consumers, we have a big part to play. We can buy cheaper alternatives — government leaders recently extolled house brands — or switch to substitutes. A cheaper brand of rice, butter, cooking oil, coffee and the list goes on.
In doing so, we are deliberately sending the message that the high prices or inflationary bubbles — worst of all, the discriminatory and unjustifiable increases — are untenable. And as demand is curtailed, prices will drop, eventually.
The oft-cited reasons for the inflationary pressures are the commodity boom driven by pent-up demand in the BRIC countries (Brazil, Russia, India and China) as well as the diversion of food for bio-fuels. The low global interest rates and effective US dollar depreciation have also been contributory factors.
But the catalyst in this commodities boom must surely be the heavy-duty speculation by hedge and commodity funds trying to make up for the huge losses sustained in the credit crunch that hit the global financial sector, and in particular the United States, the last nine months.
Admittedly that is a global phenomenon. Aren’t we fighting a losing battle? How do we figure in this grand scheme of things?
Signs are emerging that the oil and commodity prices are looking to soften from their recent dizzying heights. Federal Reserve Chairman Ben Bernanke’s comments this week that he does not want the US currency to weaken any further because of risks to inflation caused the dollar to strengthen against the majors like euro and yen. This has had the desired effect of reversing the prices of commodities, including oil.
What remains to be seen is whether as prices of these commodities ease, a corresponding drop is registered in the end-products. Merchants and hawkers who are fast on the draw when it comes to the upside must display a similar swiftness to the downside.
When all is said and done, as consumers we have the all-powerful weapon of demand destruction. We hold the trigger to demand. It is the great equaliser.
The writer is a media consultant.
