Wednesday, 9 March 2022

Time to change the rules


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.


Anonymous said...

I don't think we are at all serious about stopping Putin. Yes, we want him to stop killing innocent civilians and, yes, we'd like him to stop all the wanton destruction, but I don't think anyone 'in power' really disagrees with him about the need to do something about the government/politics of Ukraine.

Pesky little countries have a habit of causing all sorts of trouble, especially pesky little countries that mythologise one version of history, re-invent/rejuvenate old languages and stir up misguided emotions of nationhood/statehood.

What's happening now will become more common in the future, the world is in a new state of flux, the old order is determined to re-shape constructs arising from past mistakes, and the new is using all kinds of population manipulation and emotional blackmail to cling on to what they believe should now rightly their destiny.

Winners and losers aren't yet clear, that's why no-body other than Putin has dared show their hand.

John Dixon said...

You demonstrate, far better than I could ever do, that the mindset of some British unionists has more in common with Putin than with the defenders of Ukraine; and specifically the belief that the bigger and more well-armed states have the 'right' to decide which peoples are or are not nations, which nations should be allowed to exist, and which nations should be removed from the face of the earth, based, in essence, on whether their existence is in some way perceived to be an inconvenient nuisance. It is a nasty and intolerant form of nationalism which starts from the assumption that its version of history is right, meaning that any other version is axiomatically wrong. And it's also fundamentally anti-democratic, in its denial that people have any right to choose for themselves. History is not some absolute and objective truth, it is the interpretation and weighting of facts - a process which inevitably means that history is always changing. And 'popular' history - the story that a nation tells about itself - is always and invariably mythologised, few more so than in the case of Britain / the UK.

Anonymous said...

The question is, do we have a better chance of preserving/bettering life if we all try to forget the little differences between us and concentrate upon the much greater opportunities for us all if we group together in so-called 'unions'.

And if so, where do the politicians figure in this changing landscape, for it is the politicians who are to blame for chiselling away at each injustice done to successive generations, fracturing all hopes of a general commonality in the hope of winning an extra vote here and there.

The past thirteen days has taught us much about ourselves. For sure I could never see myself or my family lifting up a gun and going to fight for the continued independence of the UK or Britain or Wales. It just isn't worth it, I'm happy for one set of politicians to be replaced by another and then another, just leave me in peace please (given that I promise to learn whatever language you want me to speak, pay for things in whatever currency you consider valid). On the other hand, we have a population of young Ukrainian men being forced by their government to defend their country against an overwhelmingly superior Russian military and not a single politician in the UK has dared speak out against such an insane demand. Utterly reprehensible!

John Dixon said...

You seem to conflate being a member of a union with eliminating 'little' differences. I understand how, from the perspective of an aggressive and domineering UK or Russian nationalist that may appear a sensible conflation, but that's not the way it looks from the mainland. The EU is a union, but with no desire to eliminate 'differences' or languages, despite its unfortunate habit (albeit unsurprising given that it's an organisation of member states) of seeing the existing member states as the 'natural' units. I see no conflict between maintaining a rich diversity of languages and cultures and being willing to join in such a union. Building and maintaining a common sense of humanity on a small and vulnerable planet requires us to work together but it doesn't require us all to be the same.

I really don't know what I'd do in the situation of Ukraine today. I support both the right of the people in any area to determine their own future and the idea that war is ultimately futile. You clearly have a firm view on your choice. I wonder though whether you'd stick to that if the lives of your family were being directly threatened - for my part, I just don't know how I'd react, but I'm glad that I'm not being forced to make that choice. And I'm no more a fan of military conscription than you are.

You do, though, seem to hold a very dismal view of what it means to be human, reduced to doing whatever any particular bunch of politicians tells you to do just as long as they don't kill you. I think we can aspire to more than that, even if achieving it isn't straightforward.

dafis said...

John - you make valid points about the limitations of the market particularly where there are political decisions to exclude a significant part of the supply side. However there is a recent history of "excluding" parts of the supply side. That is what has happened with the "Greening" of our energy policy which is eminently laudable but in reality we have shut down proven sources while still tinkering with new technologies. Politics apart, this reveals an immaturity among our decision makers which exceeds their incompetence. All the old cliches like carts before horses etc apply here. Jumping the gun for the sake of a hefty round of virtue signaling has not done us or the rest of Europe any good at all. That faux pas alone confirmed to Putin, if he needed evidence, that collectively the West can't tell its arse from a hole in the ground, and the Chinese have noted that also.

Anon - you are quite fixated about self preservation. Your willingness to accept any kind of "union" imposed by unspecified others suggests a man afraid of his own shadow. I've lived my entire life in the shadow of something nasty or other whether it is Cold War nukes, endless proxy wars or the modern terrorism phenomenon but have never allowed it to inhabit my daily personal view of life. Life just goes on and one accepts some stuff and kicks up a stink on other issues. Hence my stance on the post EU condition in UK. I backed Brexit as I saw it as step 1 towards the next step - secession from UK. Behaviours of UK since 2016 have only served to reinforce that view. Such a move might entail personal pain which I will accept if the majority here in Wales ever elect to move in that direction. Part of my mission for my remaining years is to persuade those with whom I mix about the need to head in that direction. No preconditions about ideology, no exclusions, just finding common ground and advancing it.

John Dixon said...


I understand your caution about the dangers of political decisions in relation to markets. However, where a market is working against, rather than for, fairness and equity, and is damaging to social solidarity, intervention can surely be justified. And in the specific case of oil in the here and now, if supplies are going to be rationed (and they are), do we want that rationing to be delivered on the basis of ability to pay or on the basis of an attempt at fairness? I don't immediately see any third way between those two.

dafis said...

John I don't disagree with what you say. Most likely its the quality of political decisions that bother me most. We need not have been in this sorry predicament had government been more clear headed in its approach to the move towards clean energy/ renewables/sustainability/ the environment. Initially under pressure from an assortment of narrowly focussed green evangelists, governments and business leaders quickly found it easier to climb on board the bandwagon and engage in a rush of cynical virtue signaling without taking the steps needed to manage a well thought out transition to "the goal".

Even before the Putin crisis we were wading ever deeper into deep shit. All the mad Russian has done is accelerated the process. We had plenty of our own madmen leading us in that direction before the invasion of Ukraine.

That the planet needs to confront its pollution is not the point of the debate. We need some rational thinking in the planning and execution of a transition which doesn't impoverish ordinary people while enriching the chosen few. That work will need to run at variable speeds to enable the less "technologically/ industially advanced" to make their way to the goal at a less onerous pace. The one size fits all stance won't work and, believe me, the Chinese and others won't wear it anyway.

CapM said...

Unilaterally and relatively quickly the UK could take steps to alleviate the domestic energy costs of the less well of by introducing a sliding scale for payment.
The first 100 "units" could even be fixed below the commercial rate, the next 100 would be more expensive and so on and so on.

Inverting what is an unfair and accepted bonus for being rich. The more you can afford to buy the relatively less expensive things are.

Spirit of BME said...

The Blessed Adam Smith would never call the supply of oil a free market, as the raw material is controlled by the second largest monopoly cartel (the first being diamonds), he ranted against such distortions in the market.
Refineries are run to maximise the product output from the barrel, it is a finely tuned process which means that you must obtain certain blends of crude to make it work. If part of that mix is cut off, then the refinery ceases to produce the quantity they are committed to sell to the market. They then must go on the open market to make up the difference, at a higher cost. They can put some of the products through ‘the washer’ again’ to try and increase yield, but this is at a much higher cost.
One of the things that inflates their books is the 90-day strategic stock, which is a kink in the supply chain rather than a static amount, The oil companies are forced to contribute to it as part of their licence to trade. It is held in the name of the company, so when the market price of oil increases, that value is reflected in their books and when it falls, they make big losses.
The only perfect markets are in economic books, in the real-world companies must deal government edicts, tax demands that distort global competition, which leads to a mountain of regulations that demand an army of administrative staff to adhere to or circumvent.

CapM said...

The power/influence the fossil fuel industry has is reduced when consumers choose or are made to use less.