Friday, August 19, 2005

The Price Mechanism Will Adjust Behaviour

From Brad Delong’s Semi-Daily Journal, 18 August, comes a story from the New York Times showing the effects of world oil prices on bureaucrats within the Communist State apparatus in China both at the to, in Beijing, and nearer the ground in Guandong:

Fuel Shortages Put Pressure on Price Controls in China - New York Times: Sudden shortages of gasoline and diesel in Southeastern China are reigniting a debate here: Is pressure from state companies, coupled with freely available information on oil prices, driving China to accept market forces faster than it may have wanted?

Dozens of service stations in Southeastern China, notably in cities near Hong Kong, abruptly ran out of fuel this week just as officials in Beijing were debating requests from domestic oil companies to charge more for diesel and gasoline. The shortages have produced long lines of angry motorists... disrupted some freight shipments.... Sinopec, the state-controlled oil company that dominates the refining of fuel in China, especially in Southeastern China, said late Wednesday that the shortages were a result of people stockpiling fuel now that they have enough information to bet on the direction of oil prices.... People in China today have much greater access to information about world prices than ever before, and as they see high world oil prices, they are topping off fuel tanks in expectation that China will soon raise domestic prices, Mr. Jia said. "They buy inventory for their own tank in the hope the price will be changing," Mr. Jia said. "People think the trend in China should be toward a price increase."

Interesting illustration of how world markets intrude into business decisions in a communist economy. Prices are set by the State Officials in Beijing, a long way from the hinterland of Hong Kong (itself a separate economic entity). In the absence of an upwards price adjustment, suppliers (managed by State officials) begin to hold back capacity, as they can (making excuses when asked why their refineries and distribution centres are shipping well below their normal 97 per cent capacity: ‘holidays of personnel’,’ maintenance schedules’, and whatever else the fertile minds of bureaucrats think up to protect their fiefdoms), in anticipation of rising prices in future (just like normal market- oriented hoarders).

The main point to notice is that the same reaction of individual customers to anticipated future price movements is evident (Adam Smith’s point about the propensity to ‘truck, barter and exchange’ is ubiquitous and that individuals behave similarly to those in markets, even when their ‘markets’ are as imperfect as they are in a communist managed economy).

Drivers, and factory managers, keep their fuel tanks full; small unit consumers fill their jerry cans, borrow or buy more jerry cans, and tell their friends and relatives to do the same; others observe people doing the same and, as word spreads, more jerry cans appear at station forecourts to be filled. The owners of petrol stations, or their managers, can see what customers are doing and call their families to get down quickly and fill up too. The combination of higher demand in fear of going short and lower supply to make the officials’ books look better when prices eventually rise exacerbates the swings in the situation. Individual hoarding postpones individual shortages; but willy-nilly, economising on the use of the scarcer commodity gradually takes over.

Meanwhile, world demand rises to fuel the rapid growth of China and India, and the world’s media spreads the news to those who have not noticed it yet, repeating the cycle on a bigger and bigger scale. Conditions mature for a tall spike in demand prices, which fuels the mania of the hoarders, and the ‘panic’ spreads, along with the doomsayers’ laments rising towards its crescendo.

Now, enter one reaction from the other part of the world, far from Brad’s California, in New Zealand, from one excitable pressure group, “Powerless New Zealand”, in their press release via Scoop (‘independent news’), which they call ‘Peak Oil’:

New Zealand Ponders Peak Oil Thursday, 18 August 2005, Press Release: Powerless New Zealand

“Thus, as a consequence some might argue of the exploding global capitalistic society within which we live it is ourselves that have driven the price of oil to its current level. Don’t blame the oil companies blame yourself. And if enlightenment philosopher David Hume was correct in that “all conflict springs from scarcity” the roller door to the double garage of self-destruction has already been opened. Iraq and Iran both swim on a sea of oil and everybody wants it. We want it so bad we are prepared to die for it.

With an election looming PowerLess NZ invites New Zealanders to make the distinction. Simply email your politician and ask them how they are planning today for peak oil – building more roads obviously is not the correct answer (nor for that matter is dropping out of Kyoto). Don’t accept feel good newspeak answers.

Supply of the black oozy lifeblood of the economy will begin shrinking by about 3% per year. Economic growth throughout the western world will end abruptly as hyper-inflated oil prices become structural shortages! Hume’s conflict will manifest itself at the service station as well as the streets of Baghdad.

The remainder of this decade will be increasingly defined by energy or a lack thereof. Voters ought to consider this issue seriously; our collective continued well being depends on action now. Well prepared, New Zealand could be well placed to weather such a storm but preparation will require intensive national effort in order to dramatically reduce our dependence on fossil fuels. This election make the right decisions so that the effort can begin.

Steve McKinlay for Powerless NZ, 18 August 2005, [leads] a growing group of scientists, energy analysts and concerned citizens whose principle objectives are to alert both Government and the general public to New Zealand’s looming energy crisis.

Our aim is to support development of renewable energy resources at both a private and public level, as well as encourage a firm move away from dependence upon fossil fuels. More information about global peak oil and resource depletion can be found at and

There we have it. The language of forced similes and metaphors, complete with the usual code word: ‘concerned citizens’ (whose forebears were the inner voices that urged on lynch mobs and religious extremists of past generations) want government action to ride the ‘looming energy crisis’ at ‘both public and private’ levels, i.e., a Ministerial initiative, no doubt employing the growing group of “of scientists, energy analysts and concerned citizens” (the latter forming the nosey ‘inspectors’ brigade of individual ‘misuses’ of non-renewable energy).

Who knows what nonsense this ‘growing group’ of doomsayers will impose at public expense, or what bureaucratic tyranny they will devise to implement their concerns?

Yet, staring them in the face is the most efficient way to reduce the demand for oil products, to promote alternative sources of energy and to tackle the actual energy crisis (the ‘looming’ crisis fuels their deep foreboding).

It is called the price mechanism. Attempts to thwart it always fail and history is replete with attempts to do so. The efforts of the local bureaucrats in China, and similar efforts in the rest of the world, are the froth of the early recognition that is expected from a price system; it is not a sign that the end of the world is ‘looming’.

Once the price system gets into its stride the behaviours of everybody in it will adjust without a single Ministerial cabal, hysterical cry of a single ‘scientist’ or ‘energy specialist’ (read oil company employee), or a frown of concern from an individual citizen. Of course, all would prefer to pay less for anything and have more of it, but we all agree that they cannot without sacrificing having something else – because all economic goods are scarce; see Economics 101.

Now David Hume understood that, as did Adam Smith. Apparently, "Powerless New Zealand’s" sponsors do not.


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