Well, my guest blogging stint here has gone somewhat awry. My post on trade relations was sent in Tuesday morning last week, my time. By serendipity, the University’s public relations office called a half hour later asking if I could do an interview with Canterbury Television that afternoon on US-NZ trade relations. I said I could, but that I couldn’t leave campus; they were happy to come to my office for 2 PM. Very lucky call, that one.
I was putting on my coat at ten to one to meet a friend from the NZ campus libertarian organisation for lunch when things started moving. We’d had a very big earthquake in Canterbury back in September – a 7.1 in the middle of the night experienced from my bed on the second floor of an old wood-framed house. The next big aftershocks – the 4.9 on Boxing Day and the 5.1 mid-January – were enjoyed either at ground floor or while in bed. I got pretty good at guessing the magnitude of aftershocks from my office. For any decent one, folks would throw their guesses up onto the #eqnz Twitter hashtag. The crowdsourced seismograph performed admirably well* – often within a decimal point of the actual reading. But I wasn’t well calibrated for anything over around 4.8 while up on the fifth floor of the University of Canterbury’s Commerce building.
And so I didn’t have a very good read on how big this one was. I guessed a bit bigger than Boxing Day. That was more than a little wrong. The Canterbury Television building had collapsed; I don’t know whether the reporter who was to have come out to see me at Uni had left yet. They’re still pulling out bodies. Glad I didn’t go to them.
We came out pretty lucky. A tall heavy bookcase fell between rather than on my wife and a coworker when they were leaving her office. The kids were fine at home with my parents, who visit to escape the Manitoba winters. This year it’s been an adventure holiday for them.
Enough whining, especially as other folks have stories far better than mine. Back to economics. Or, at least to economically informed whining.
Half the petrol stations in town were closed due to power outages. Most of the others couldn’t keep enough petrol in stock to meet demand. The port at Lyttelton where fuel’s usually offloaded took damage as did the tunnel which serves as main access for fuel tankers getting from port to stations around town. We temporarily had to source fuel from Timaru – the next port town a couple hours south of here.
We were caught in a bad equilibrium. We were assured that fuel supplies were sufficient to meet normal petrol demand. Normally, folks fill up, wait till the tank is near empty, then fill up again. When everybody knows that there will be enough petrol there tomorrow, and everybody knows that everybody knows that, things work out just fine. Suppose that everyone normally goes seven days between fills and suppose for simplicity that folks are evenly distributed across normal fill days. Expectationally, stations have to have enough fuel to fill the tanks of one eighth of the cars in town. When natural disaster strikes, precautionary demand for petrol jumps. Instead of waiting ’till the tank is down to an eighth, people fill up if the tank is half full. Because they might just have to drive pretty far pretty fast if things get worse. If we moved seamlessly to the new equilibrium, that would be simple. Twice as many transactions, each with half as much volume dispersed.
The problem is the transition. For a short burst, the petrol stations in town have to get a whole lot of folks filled up. After the transition, they go back to pumping the same amount of petrol to twice as many customers. During the transition it’s tough – especially if supplies are tight. Petrol stations are able to handle big increases in demand, if they’re prepared for them. Everybody fills up before heading out for holiday weekends and we tend not to have problems. But when it’s coupled with surprise and cutting the number of stations by a third or so and restricting tanker supply to the stations – we get queuing and empty petrol stations.
The civil defense folks could well have been right that there was enough fuel in Christchurch to meet normal demand. But meeting normal demand would seem at the boundary of capacity when the number of stations is reasonably heavily reduced. Meeting this kind of transitional increase in demand is impossible. But in the temporary shortage case, everybody tries to be first mover; you only hurt yourself by holding back as there may not be fuel left next time you drive by.
How to solve it? I suggested a temporary doubling of petrol prices. Let the petrol stations coordinate a $2/litre price increase that lasts long enough to get the running stations filled to capacity with fuel – a couple days would have done it. Those with urgent need would buy the expensive petrol; others would wait the couple days. Unfortunately, this would likely result in the lynching of petrol station owners. And maybe me with them. Normally we want big price increases to help encourage more supply to come into the market – the excess profits draw petrol tankers from farther away. But it’s not terribly plausible that there’s much margin for increased effort. The petrol companies were flat out getting more petrol here. So we could then call the extra $2/litre an earthquake surcharge with proceeds to be used for the various earthquake relief funds.
It’s unfortunate that folks’ first reaction to price increases in emergencies is “this guy is trying to screw me” rather than “man, supplies are tight!” I can’t count the times I’ve heard folks arguing that cell phone calls should be free in Christchurch for the duration of the emergency, despite lots of calls in the early hours for folks to keep off phone because power outages had massively decreased capacity and folks trapped in buildings needed to be able to call or text for help.
Most folks move from “We need it more” to “It should be cheaper.” And so stores do better by keeping prices constant and letting supply run out – the reputational costs of price hikes outweigh the profits from increasing prices and meeting demand. It’s an inefficient equilibrium. I’d even call it a market failure. And, a remediable one, at least for a temporary problem like petrol supplies. Government could ask the petrol companies to hike prices for a very short period, with the excess revenues going to the relief fund for the emergency. If it induces a black market with arbitrageurs bringing fuel in from out of town to sell above the out-of-town price but below the government surcharge price, so much the better!
More bizarre have been arguments that price increases would threaten the social solidarity on which cities rely during crises. I’d like to think that we’re a bit more resilient than that.
The fuel crisis is now long over, at least in the parts of town with power. But for a few days, folks in the Eastern suburbs with low fuel tanks were effectively trapped there by not knowing whether it would be possible to get fuel at any price if they went to the part of town where the stores were open. Those suburbs are also the poorer parts of town that were worst hit in this quake, the epicentre of which was east of town and shallow. For all the folks who harped on how a fuel price rise would hurt the poor, it was the poorest parts of town that were worst hit for want of petrol.
With no power and water in South New Brighton, we made a 6 am (no traffic – would have run out of fuel in traffic) dash out of that part of town late last week after I’d scouted a route by bike that would get us around the river – all the bridges were out – to the other side of town. We hope to get back home when services are restored over there. And hopefully when life gets back to normal, I’ll return to finish the guest-blogging session.
* Geolocated Twitter earthquake magnitude estimates combined with seismograph readings would have to be interesting data for somebody.
7 thoughts on “Rumble Rumble”
I don’t think it would take industry collusion to bring the price up. If demand is truly as scarce as you say it is, even a sole retailer raising prices will manage to sell his entire stock. Once others realize they’re losing $2 a gallon in potential profits, they’ll adjust to follow suit.
The real problem here is that public shaming has destroyed the free market. There’s no reason for retailers to have to worry about public opinion. If your facts are true, even the first retailer who raises his price will sell his inventory. If the retailer is worried about violence in response to a raise in price, then your society is far closer to moral bankruptcy than you will admit. If he is worried about social good, he should not be. It is not his duty to sacrifice himself on the altar of the public good (nor would it do the public any good: but that is the classic conundrum of such a sacrifice). Thus, there is no good reason why a retailer would not raise his prices according to the model you’ve suggested.
So if what I’ve said is true, and even a single retailer raising prices should be enough to move the market in the right direction, why has it not happened yet? There are only two possibilities: either retailers CAN’T, or they WON’T. If they WON’T, this means that there isn’t a single honest retailer left in your city who isn’t trying to delude himself or others that he is a completely selfless being. If they CAN’T, either for fear of public reprisal or because of government or external controls, then a free market truly does not exist. I am not sure which is worse.
@Abraham: Retailers rightly fear long term reputational costs. Same in the States though: nobody hikes up the prices of snow shovels in a blizzard. Customers won’t resent a store for running out of stock, but will hold a long burning grudge for a price hike.
There’s some truth to that, but there’s certainly a range within which to operate without gouging your customers. A retailer could probably raise the price ten cents in a day without ruining his reputation. Over the course of three weeks the price would jump to desired levels, and enough competitors will have caught on. There must be a balance between price gouging and being enslaved to the social good.
We needed a really big really short price increase. No increase small enough to save reputation would have been big enough to substantially reduce consumption.
I eagerly await $5, $6, heck $10 a gal gas here in the U.S., I want people to feel real pain and I want them to finally realize that fossil fuels and the wealth that comes along with extracting them and distributing them is wrong, oil speculators cause the price to go up, artificially, all the time, gas station owners are the ones who are hurt and pay the price in decreased profits when oil speculation rises to a fever pitch.
Please, make gas so expensive that people across the globe finally stop driving and turn to green technologies that are the future and will only result in green technologies affordable.
The point of prices isn’t to punish, John.