What is this ‘destruction of demand’ principle that we hear so much about? Now that the energy crisis is starting to seriously impact Europe

In reference to the war in the Middle East and the resulting global energy crisis caused by the closure of the Strait of Hormuz (essential for oil and natural gas transport), economists and financial experts are increasingly referring to the principle of «demand destruction». This expression essentially means that if the quantity of fossil fuels is no longer sufficient to meet the energy needs of all countries in the world, someone - governments, companies, and consumers - will inevitably have to give up using them.

So far, many states have relied on their emergency energy reserves, introducing subsidies to contain rising market prices, as Italy has done, for example. However, after more than two months of war, these measures are no longer sufficient to deal with the crisis. According to the principle of demand destruction, reduced fuel availability forces individual countries to cut consumption, limit travel, and slow down overall economic activity, with all the consequences that follow.

The direct and indirect consequences of the «demand destruction» principle

The principle of demand destruction does not apply only at the macro level, but also at the micro level. This is clearly visible in the case of air transport, where some airlines have already activated plans to concretely reduce consumption: Lufthansa, for example, has announced that it will cancel more than 20,000 short-haul flights between May and October to save fuel, while other routes will be suspended for at least six months.

There is also a risk that the principle of demand destruction may have to be applied in historically wealthy Western countries. For instance, in the United States gasoline has recently reached its highest average price since the start of the war, at 4.18 dollars per gallon (about one euro per liter), the highest recorded since 2022. Before the war in Iran, gasoline in the US cost 2.98 dollars per gallon. The 4-dollar threshold has long been considered a kind of "psychological barrier" for American public opinion: beyond that level, the price is perceived as excessive and no longer sustainable for local consumers. This is a major political problem for Trump, whose public approval has already dropped significantly.

What European countries are doing in the meantime

Analysts argue that the economic impact of the Middle East conflict has not yet fully materialized in Europe. The effects of the war are only now beginning to appear, with several weeks of delay compared to the start of the war in Iran, due to the technical timeframes that characterize the energy market. Tankers take several weeks to complete deliveries, and so far Europe has continued to consume fuel purchased and shipped before the crisis began. In other words, the fuel used today on the continent had already been extracted and loaded onto ships before the closure of the Strait of Hormuz, or it comes from stocks accumulated in previous months.

For now, European governments are following a strategy opposite to the principle of demand destruction: instead of drastically limiting demand, they are trying to support it, even at the cost of increasing public spending, with the aim of preserving people’s purchasing power. In Europe, at least 16 countries are already using public funds or cutting fuel taxes to protect consumers from rising prices.

At the EU level, the same direction is being taken: Ursula von der Leyen, President of the European Commission, has announced an emergency package of measures called AccelerateEU, aimed among other things at supporting energy-intensive industries. This phase of artificially containing price increases, however, is expected to end soon if no concrete solutions are found to resolve the global energy crisis.