The war in the Middle East is forcing global oil users to rethink their consumption patterns. Growing shortages have jacked up prices for crude oil and refined products, forcing many economies to reduce energy use. While much of this demand loss will likely prove temporary, some could be permanent due to structural shifts or sustained fuel-switching. Refined products will drive any loss in crude demand, while more replaceable and often subsidized liquids like LPG are most vulnerable to demand erosion becoming destruction. Demand destruction and erosion are not the same: Destruction is permanent and irreversible, while erosion is temporary and cyclical. The current crisis is a supply shock — the largest ever — squaring off against largely inelastic demand; it is not a collapse in the underlying need or desire for oil products. Demand across many products will necessarily erode: It will get rationed, absorbed at a higher cost or deferred. Demand erosion tips into destruction when alternatives become systemically cheaper or a shock triggers significant investment to use them or bring them to market. Oil today has a 34% share of the global energy mix, down from about 40% in the late 1980s-early 2000s, and 50% in 1978, the year before the Iranian Revolution led to one of the world’s worst oil shocks. The accelerating build-out of renewables and low-carbon technologies today, due to increased market competitiveness as well as policy support, makes the potential demand response to the current crisis unique across history and presents its own mix of uncertainties.
