Government meddling means more pump pain

The truth that no-one wants to hear right now is that fuel prices probably aren’t nearly high enough.

Remember, if there’s a real shortage, someone, at some point, is going to miss out.  That pain is ultimately unavoidable.

Scarcity pricing is the market’s way of determining who misses out and when. Those who really need fuel will pay for it.

The alternative is hoarding, and we lose control of the process of allocating fuel altogether. If people think fuel today is much more affordable than it will be next week, they’re going to grab and hold as much as they can.

Then supply chains break down. The price is fine, but the fuel is just not there.

For markets to manage this, prices have to rise high enough to fully price in the expected future shortage.

Unless every second person is shocked enough by the pump price to think it may be cheaper next week and just buy what they need today, the prices aren’t high enough.

In other words, what people call price-gouging is actually the market performing its essential function: deploying higher prices as the natural antidote to hoarding.

This isn’t just at the bowser. It happens along the length of the supply chain; from importers and refiners, to distributors and depots.

If you think it’s near certain you’ll be able to charge more in the future, you just hold.

And this is what we can see has been happening.

Chris Bowen is probably correct in telling us that demand has doubled, at least from the top of the supply chain.

And he’s probably also correct in saying that there’s still quite enough fuel in Australia. For the next couple of weeks at least.

So what’s going on?

Everyone, all along the supply chain, is buying (or not selling) as much fuel as they can, because they know that the price today doesn’t reflect the shortage coming tomorrow.

When, within days of the first bombs falling in the Middle East, farmers stopped getting their fuel delivered… that’s what was happening.

The diesel was in country, but everyone up and down the supply chain wanted to hold onto more of it.

Those who could buy, bought. Those who normally sell, slowed or stalled deliveries.

If prices were allowed to rise to the level distributors were unreservedly willing to sell at (reflecting the risk that prices might fall soon) this behaviour wouldn’t happen.

Yes, the price has to be high. Really high.

Unfortunately, there’s an unhelpful knee-jerk political reaction to demonise the market’s method of rationing by labelling it as ‘price-gouging’.

This panders to the scapegoating instinct to blame some ‘greedy capitalist’ corporate entity for every cost-of-living grievance.

Unfortunately, the pain from a fuel shortage is real. And it is inevitable.

It’s been caused by decades of governments shirking their duty to support more domestic fuel production.

But there’s absolutely nothing that can be done in the grip of a crisis other than to manage the distribution of the pain.

That pain cannot be avoided… it can only be managed. Either markets impose higher prices that deter hoarding, or governments impose rationing: restricting how much people can buy when artificially-low prices keep demand high.

Or we persist in the illusion that the pain can be avoided: simultaneously denouncing ‘price-gouging’, whilst pleading for consumer restraint, and then wondering why deliveries falter and tanks run dry.

The government must level with the population. The risk of shortages is real and they must be managed.

The market can be an ally in managing the pain, but only if it is allowed to operate freely — allowing prices to rise and signal scarcity.

Alternatively, the pain could be managed through rationing, with the government stepping in to say who goes without when prices are kept too low to curb demand.

Failure to embrace one of those options will mean tanks simply run dry, and the services that keep the country running will start to break down at rates and paces we won’t be able to predict or control.

Aidan Morrison is director of energy research at the Centre for Independent Studies.