Posted on 09/02/2005 10:05:18 PM PDT by NonZeroSum
With every disaster or crisis, it seems that the public, press and politicians require a remedial course in Economics 101. In fact, apparently we need an ongoing educational campaign even when there is no catastrophe, as demonstrated by the recent foolish legislation in the state of Hawaii to cap wholesale fuel prices. Note the subhead in the linked story: "Some analysts warn move may spur supply problems."
Really? Only "some"? Maybe they need to be more careful about which "analysts" they listen to. Whatever would we do without those other "analysts"?
Imagine the headlines, "Legislature Mandates Pi To Equal 3.00000 -- Some Analysts Warn Move May Spur Engineering Problems," or "King Canute Commands Tide To Recede -- Some Analysts Warn Move May Spur Wet Footwear Problems." What would we think of the analysts who thought that the proposed mandates were no problem, perfectly in consonance with the laws of physics and human nature? Even most people with typical journalism educations would recognize such heads and subheads as the jokes they are, but somehow when it comes to basic economics, the laws of supply and demand, and the function of prices in a market economy bizarrely remain subjects for public debate.
I write this little essay sadly, knowing that it's been written many times before, and that it will have to be written many times again, if history is any judge. It's hard enough to watch all of the suffering of these apocalyptic events on the Gulf Coast without having to contemplate as well the compounding of the problems that will be achieved in future days by editorial writers and public officials with their calls for defiance of economic reality. I grind my teeth in frustration at all of the economic damage that will continue to be wrought by well-meaning but economically ignorant people as they attempt to circumvent the most efficient means of delivering products and services to those areas in which they are needed most -- the market, with its pricing mechanisms.
Let's recap, briefly, for those who never took the class, or have forgotten it. It's really simple. In any locality, when the supply of a particular item is reduced with no change in demand, or the demand for it increased with no change in supply, or supply is decreased with a demand increase, prices will go up.
This is a signal to the market. To those demanding the product, it is a signal that the supply is relatively short, and that they should perhaps rethink the level of their demand, if possible. To the suppliers, it is a signal that more of the resources must be brought to market. In both cases, it will result in a change in behavior on both parties that will restore the balance between supply and demand. Moreover, it does so in a useful, quantitative way. It tells the supplier how much expense, risk and effort she should expend to increase the supply. This calculation may even bring new suppliers into the market. It also indicates the degree to which it is sensible for the consumer to change their demand. When by fiat we pretend that the price has not gone up, it's like covering up the signposts, and we shouldn't be surprised when those supplying no longer attempt to increase the supply, and those demanding can't be bothered to reduce their usage of that particular commodity.
What does this mean in the current situation?
Let us ignore for the moment the horrific situation in the worst-hit areas, in which first-worlders have been thrust into the third world literally overnight, many with no place to even sleep, let alone have access to food, water and other necessities or money with which to purchase them. In some of the other areas, homes are damaged, but intact and dry, and people have cash. Commodities like gasoline, perishable food and ice are in short supply. In fact, gasoline prices are rising across the nation, in response to the sudden reduction in refinery capacity on the Gulf Coast.
Consider -- if a gas station owner has gas, someone has to decide who gets it. If the price remains at pre-hurricane levels, many will fill their tanks, because they can afford to do so, against the chance (and even likelihood) that gas will later become completely unavailable (a self-fulfilling prophecy if the price is not allowed to rise). Many will do so even if they have no immediate need for it. But after the first few people do this, the gas will be gone, and none will be available for those who come after, because it's now tied up in the gas tanks of those who didn't really need it. Those who didn't get any may include emergency workers, or truck drivers who need it to go out and find other goods to bring in. It is likely worth more to them, but they didn't get it, because the price was artificially fixed. Moreover, had the price been allowed to rise, they would have been able to afford it, because they would have been able to demand more resources with which to pay for it -- the emergency worker might have had aid from local agencies to pay for it, or the truck driver might have been willing to make the investment in order to recover it by bringing in necessary goods (assuming, of course, that prices on those weren't capped).
Similarly, if ice prices rise to the market, the man who needs to keep his insulin cold for his diabetes treatment will place a higher value on it than the man who wants to keep his beer cold, and will have a better chance of getting it. The man who might rent two hotel rooms for his family for additional comfort might, in the face of appropriately higher prices, inconvenience himself and only get one, releasing one for another whole family.
This works for the supply side as well. Making and transporting ice costs money. When the local ice plant is out of commission, it has to be brought in from other locations, in refrigerated trucks, at higher gasoline costs. Who would bother to take the trouble, expense and risk to deliver it at a loss when they can only get the same price for it as before the hurricane?
Of course, some argue that prices shouldn't go up for stock on hand because the cost didn't go up. After all, the gas station owner is selling gas that he already paid for at pre-hurricane wholesale prices. Why should he make "obscene profits," taking advantage of a situation by jacking up the price when his price hasn't changed? But in reality his prices have already changed. He will have to replace the gas that he sells, and he knows, either indirectly because he understands the supply situation, or directly because he's gotten a call from his supplier, that the cost of his next tank load will be dramatically higher. In order to pay for it, he has to get as much as possible for the stock he has on hand, which means as much as the market will bear against his competition, if he has any. If he doesn't have any, then he just has to guess.
But won't some people make "unfair" profits from such "greed"?
Sure. Sometimes life isn't fair. We can't eliminate unfairness from life -- at best we can minimize it. But what's more unfair -- someone who supplies a community with needed goods while making a profit (at some financial, and even personal risk, given the breakdown of civil law in many areas, in which shipments can be hijacked), or someone who overpurchases and hoards a commodity because the price doesn't reflect the demand and supply? Ice at three dollars a bag doesn't do one much good if there are no bags available at that price.
The response to this, in turn, is that the solution is rationing. But is it more fair to have a bureaucrat, perhaps unfamiliar with the needs of the local community, making decisions about who should get scarce goods? Does the local commissar understand the market better than the market? We can recognize that when prices are high, some people of modest means may not get essential goods. A better solution for this is not to subsidize prices, which misallocate the resources due to the false market signals, but to subsidize the individuals who need help, by giving them cash or vouchers (somewhat akin to the food stamp program).
Price "gouging" is purely in the mind of the beholder, and there's no way to distinguish between it and the necessary signals that the market must have to ensure the most efficient use of resources. The price "gougers" are (often, if not always) the people who will have incentives to satisfy market needs as quickly as possible, and ensure that the economic recovery will occur. That some people may "unfairly" take advantage of this is a price we have to pay, and it's a small one compared to the alternative.
There has been much discussion recently (much of it foolish) of how this disaster was a result of "fooling mother nature," whether in the absurdity of asking whether or not it's a result of not acquiescing to the unjustifiable damage to our economy that would have resulted from the Kyoto Treaty, to the more sensible questions of how much effort we should expend to continue to divert the natural course of the greatest river on our continent. To whatever degree that's true, let us not compound the damage, and slow the recovery from it, by attempting to fool mother economics.
Still the prices this winter... looking forward to OUCH.
There was one plan some time back which basically said use all the gas you want, one fixed price (not per therm, per month). That would be the year to get a gas barbecue and cook every day on it.
That's not helpful to your argument.
Gas going to $6.00 per gallon overnight, in the mere anticipation of shortages in supply seems to fit the bill.
It is not as though there were huge lines FIRST, and the retailers raised prices; instead, retailers raised prices and people thought "Oh, no! They're running out. Better fill up NOW."
Prayers for all!
They aren't buying up the local supply.
You would have made a wonderful turn-of-the-century Robber Baron. You'd fit right in:
robber baron
(noun) : an American capitalist of the latter part of the 19th century who became wealthy through exploitation (as of natural resources, governmental influence, or low wage scales)
(BTW, the benevolent government will be by in 7-10 days to pick up his dead-from-diabetic-shock body. Please leave it by the curb, covered in a blanket. Thank you. Signed, The government.)
If he couldn't afford the pump at the price the gouger is selling it at, he will be dead in 7-10 days from diabetic shock also. So the end game would be the same. And I'll bet if the gougers were stopped from gouging, there would still be plenty of pumps out there at a reasonable price with a decent profit to be made. Plus the gougers make the honest businessmen look real bad.
"Come on, show us your brilliance! Or are snide comments all you have to offer?
We're stil waiting."
It appears to me that you have a corner on this market (pun intended). Perhaps a mirror is in order for yourself to look in.
ping
Diesel fuel that is dyed red is assumed to not be highway fuel and may not be used in highway vehicles since it does not meet federal, diesel quality standards (e.g., sulfur content) unless it is used in a manner that is tax-exempt as defined by the IRS. The IRS has temporarily suspended that requirement in certain states because of the difficulty in getting food and grain stocks from the farm belt in the middle of the country down the major highways and the Mississippi River to Ports in New Orleans and elsewhere on the Gulf Coast. The port of New Orleans with the exception of the offshore oil terminal is effectively shut down. I have not checked the status of barges yet to see when they might begin operating again. [I posted the previous just to give an idea to readers a rough overview of the subject]
The IRS release on this subject was posted Sept. 2, 2005. Here is the link.
http://www.irs.gov/newsroom/article/0,,id=147221,00.html.
Here is the key sentence in the release:
"This relief applies beginning August 25, 2005, in Florida, August 30, 2005, in Alabama, Louisiana, and Mississippi, and August 31, 2005, in the rest of the United States, and will remain in effect through September 15, 2005."
This will have no affect on your outstanding contracts. The only affect will be on the carriers themselves who may use dyed diesel for their operations if they choose to do so. Whether the exemption will be extended beyond 15 sept. is an open question. After Hurricane Dennis only a handful of counties in Florida were exempted for a short period of time, and no further extensions were applied. Not knowing were you are farming and what products you are harvesting in the near future it is difficult to predict what diesel prices might be in your area in the days ahead depending on where your sources of supply are located. I assume your existing contracts extend thru the harvest season.
All the indices on the NYMEX were down today. That could mean anything in todays market with large daily swings on crude oil (CL) quite common.
I did check the Shell Oil site and the Motiva Norco and Convent refineries should restart next week. Their Capline pipeline system in the Gulf is operating at abt. 75% capacity. Pumping stations in Mississippi are down due to electric utility outages. They will be back at 100% capacity availability as soon as those services are restored. There was no damage to their piping system in Lousiana.
Also see NYMEX reiteration of rule with respect to the EPA's announcement here: http://www.nymex.com/press_releas.aspx?id=pr20050831c
When you invest your hard earned capital, aren't you doing it for a profitable return?
There is profit, and then there is obscene profit. To many gas companies currently are falling into the latter category, feeding off of a natural disaster. It morally stinks.
To = Too
and you sound exactly like the "educated" liberals who boast a diploma in place of morality.. a brain won't keep you from going to Hell.. but a heart just might.
If a natural disaster just reduced the supply, but the demand remained the same, what happens to the price?
If a natural disaster just reduced the supply, but the demand remained the same, what happens to the price?
In the area of the disaster, such as in NO, the demand would not remain the same, as everything is underwater and unusable. And the town is a ghost town, so there is no demand to be had, as there will be no people to demand it. NO is dead, for all ostensible purposes.
However, you have just set up the perfect condition for price gouging, haven't you. At least amongst unconscionable shysters who would financially attempt to feed off of other people's grief. Do you include yourself as one who would price gouge? Profit off of people's desperation? Are you one of them?
If the supply goes down, the price will go up.
That's all well and good.
But if Marathon Oil's supply goes down and their price goes up, there is someone in some office looking at available data making a decision what the price should go up to.
There is no auction at the corner gas station with an auctioneer saying "2.50, 2.50, 2.50....2.65...265...3.00, 3.00, 3.00....sold to the gentleman in the strawhat & coveralls for $3. a gallon."
Someone sets the price using some formal or informal standard or formula to do so. Let's not pretend otherwise.
I posted this same sentiment days ago. Gouging is the Free Markets way of stopping irrational hording in its tracks."
Right on all counts, it is also a way to force conservation of available resources at this time of crisis. Amen.
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