Oil prices may be falling, but for the wrong reason: ‘Demand destruction’ throttling global consumption, report finds

Oil prices are beginning to fall from their March peak, but policy experts warn sinking energy costs don’t necessarily mean the global economy has stabilized as the Iran war continues on.

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A report published by the International Energy Agency (IEA) on Tuesday noted the threat of “demand destruction” as consumers and global economies turn away from oil as prices remain elevated. According to the report, oil demand is projected to contract by 80,000 barrels per day in 2026, with the sharpest demand cuts in oil coming from the Middle East and Asia Pacific.

The IEA projected last month that global oil demand would grow by 730,000 barrels per day in 2026.

While Brent crude has come down from its record $144 per barrel earlier this month, oil prices remain elevated as the U.S. blockades the Strait of Hormuz, through which 20% of the world’s oil usually passes, and as key energy infrastructure in the Middle East continues to be a target for attacks. The IEA said demand for oil will continue to contract as supply chains remain disrupted and prices remain high.

Early policy changes suggest companies and governments are already responding to high oil prices by pulling back. Vietnam and the Philippines have called for work-from-home orders and four-day workweeks, respectively, in the hopes of limiting travel. Denmark urged its citizens to avoid nonessential transportation to cut back on fuel costs.

The International Air Transport Association (IATA), a trade group representing global airlines, said last week that jet fuel costs will take months to return to prewar levels, as a result of destruction of key refinery infrastructure. Malaysian low-cost airline AirAsia X increased airfares by up to 40% as a result of increased fuel costs, and Air New Zealand canceled 1,100 flights impacting over 44,000 passengers between now and early May for similar reasons.

“It’s an unprecedented issue as far as fuel price is concerned, but managing fuel spikes is a well-trodden path if you’re running an airline,” CEO Nikhil Ravishankar told Radio New Zealand.

Too soon to say if true demand destruction is occurring

Ryan Kellogg, an energy and environmental economist and public policy professor at the University of Chicago, said it is too early to determine if the global oil sector will see true demand destruction. The term has been used frequently to describe short-term market impacts, but it is better applied to long-term effects, according to Kellogg, noting that recent changes in oil and gas prices may just be the result of market volatility.

True demand destruction is if “this short-run volatility and price increase is actually causing consumers to make long-run behavioral changes, such that even if and when prices do go back down, they’re not going to consume as they used to,” he told Fortune.

Demand destruction could be apparent if electric vehicle sales increase at a significant level in the next couple of months, a result of consumers taking steps to more permanently reduce gas consumption, Kellogg suggested. March saw 1.75 million EVs sold globally, according to Benchmark Mineral Intelligence data, up 66% from February and 3% year over year, correlating with rising gas prices. EV sales for the first quarter of 2026 are still down 3% year over year, however.

A similar shift toward renewables happened in the 1970s. Following oil shocks in 1973, for example, Congress passed Corporate Average Fuel Economy (CAFE) standards two years later through the Energy Policy and Conservation Act, requiring U.S. fleets to improve fuel efficiency. It’s possible today’s Iran war could likewise trigger a new wave toward renewable energy and away from combustible, according to Kellogg.

“It’s very arguable that we have entered a new era in which oil supply from the Persian Gulf region is not as consistent, as reliable as we once thought it would be, and it makes sense to diversify away from that,” he said.

If that were the case, there would be “economic pains in the medium term” as we navigate the costs associated with having to accommodate the production of more EVs and volatility in other resources like critical minerals necessary to power the cars, Kellogg added.

“There’s some ability to adapt,” he said. “It comes at a cost, though.”

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