One of the few things which almost everybody ‘knows’
about economics is the law of supply and demand, which crystallises the
relationship between supply, demand and price. Theoretically, if supply falls
or demand increases, the price rises; and if demand falls or supply increases,
the price falls until, in either case, a new balance is reached (the
achievement of which new state might also involve the entrance of new suppliers
or substitute products, or the exit of existing suppliers and old products).
But, as with most over-simplistic rules, the reality is more complex.
We are currently seeing a huge spike in
oil prices as a result of a combination of fear that Russian oil will be cut
off and the decision by some customers to stop buying from that source,
although there is no reduction in demand. The oil market, in terms of its
effects on price, is working as one might expect, leading to price increases. There
is currently, though, no increase in the cost of production of oil: the same
oil, at the same cost of production, is simply being traded at a higher price.
We know who’s paying the increased price – all of us – so who’s getting the
extra money? The answer, of course, is that it’s going in increased profits –
to oil companies, speculators, market makers etc. They are, in effect, getting
a huge boost in their income for no extra cost or work. The market is working
to transfer money from the poor to the rich – not just within countries like
the UK, but also between countries. It is working to ration the supply of oil,
based on price and ability to pay. That is what markets do – unless we change
the rules.
For those who argue that we should not interfere
in markets, I’ll just point out that ALL markets have rules of one sort or
another. The questions we need to ask are who makes those rules, and whose
interests they serve. In principle, markets are the best solution that humanity
has come up with for the exchange of goods and services, but we should never
forget that they are in essence a human invention, and they should be there to
serve us, not to enslave or impoverish us. If they’re not doing that, then they
are not working for humanity, only for a section of it – and changing the rules
is a wholly rational response.
All the ‘solutions’ to the current crisis that
I’ve seen politicians putting forward (more nuclear, more renewables, opening
up new oil fields) necessarily involve long term projects, whereas the problem
is here and now. There is an alternative, but it involves those governments
wanting to hit Russian oil revenues working together, even if only for the
short term, to share what oil is available rather than leaving it to the
market. Effectively, it means forming a temporary cartel of purchasers to deliberately ration oil on the basis of need
rather than accidentally on the basis of ability to pay. There’s still an
economic hit from the reduction in availability, it’s just shared more evenly
rather than disproportionately affecting the poorest people and the poorest
countries. It would be uncomfortable, to say the least: we’ve seen the economic
results of a shortage of energy in the past (three-day week,
anyone?). But it raises the questions that have been referred to here before –
how serious are we about stopping Putin, what price are we prepared to pay to
achieve that, and who in society should pay that price? For all the rhetoric,
the answers I’ve seen to date, based on actions rather than words, are ‘not as
much as we want you to think’, ‘as little as possible’, and ‘those who can
least afford it’. Words are too easy – it’s action that is needed.