Wednesday, August 09, 2006

Why won't someone do something about fuel prices?

Australia always seems to be a bit behind the US and so it is that the frantic whingeing about fuel prices has reached our shores.

After seeing our venerable politicians and wise TV commentators going on and on about this over the past few days (Beazley reckons Howard has 'taken his eye off the ball' in letting fuel prices get so high) and getting that ridiculous chain email "Boycott Mobil, they'll HAVE to lower their petrol prices, then their competitors will have to lower theirs too", I thought I'd post something on this topic this morning. Then I noticed that the Sydney Morning Herald had done it for me with two good articles.

Brendan Bouffler in Heckler presents a blunt demand and supply analysis:
The rise in the price of fuel seems to be a worldwide phenomenon driven by a worldwide increase in demand for oil products. Think: China gets the FJ Holden craze.

But given there is a somewhat fixed supply of oil, it pretty much follows (I learned about this "supply-and-demand" thing at high school) that the price goes up when people want to buy more of the stuff than there is to sell. Think: bananas.
He thus suggests possible demand-side and supply-side solutions:
Hence the best collective action we can take to bring prices down is to buy less of the stuff. Take the bus once a week, or walk to the shops every now and again instead of driving. God forbid, ride a bike to work if you don't live in Dee Why. If you do, car pool...
If you want supply to increase (to satisfy your apparently unrelenting demand), you probably only have two choices:
- Write to councillors advocating that more oil refineries be constructed in your suburb or
- invade OPEC nations, and Russia.
Ross Gittins weighs in too:

ONE thing I hate about politicians is the way they pretend to indulge us rather than level with us. They rarely tell us the unvarnished truth about what problems they can fix and what they can't, preferring to string us along. They act as though they can fix everything, which encourages a culture of complaint and a focus on the alleviation of symptoms rather than a search for fundamental solutions.

Take all the whingeing about the price of petrol. No pollie's prepared to tell us that since the problem is a global shortage of oil, the rise in price is a healthy development because, by encouraging both producers and consumers to adjust their behaviour accordingly, it offers the best solution to the problem.

He also makes some good observations about the related issue of traffic congestion:

...traffic congestion isn't the problem. Actually, it's the solution to the problem - the only solution the public finds acceptable.

The real problem is that we all want to live together in big cities and travel to and from work or school at pretty much the same time of day. Now, it makes economic sense for us to live in cities and it makes social as well as economic sense for us to want to work when others are working.

But the problem is greatly compounded by our desire to live in low-density suburbs and to travel in our own cars - by ourselves.

So the demand for road space at peak times of the day greatly exceeds the supply of space available. The result is traffic congestion, which is merely a way of rationing the space on a first come, first served basis. It's a queue, in other words...

When demand exceeds supply we have to ration. And when you won't ration by price (which is what economists advocate) you have to ration by queue. So congestion isn't the problem, it's the solution to the problem - the only solution we're prepared to accept, our unending complaints notwithstanding.

I think some things are best handled by governments and some things left to markets. But if there's anything markets are good at, and governments bad at, it would have to be coming up with solutions to high energy prices.



Andrew Leigh said...

Actually, my impression from a couple of recent visits to the US this year has been that the Australian pollies are a lot more sensible on this issue than their American counterparts. You should see some of the dodgy stuff being written up into Congressional bills at present.

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