The west side of town was still running. But the earthquake had also damaged the pipeline bringing fuel from the terminal at Lyttelton Harbour, and power outages were an issue.
More fuel was coming. Tanker trucks were heading up from points south and would haul supply up to Christchurch. It would just take a few days.
But things went wrong.
Normally, when something becomes more scarce, its price goes up. Prices at the petrol stations on the west side of town didn’t go up, or at least not by enough to ration scarce supplies. There was no ban on price increases, or at least none that I’d seen, just pressure not to ‘gouge’ customers by increasing prices in an emergency. Some fuel companies instead tried to cap the amount of petrol served to each customer while giving priority to emergency vehicles.
It did not work well. If you were limited to only putting a small amount of fuel in your car, why not go back home and get the second car to top that one up too? And maybe a jerry-can too, if the attendant isn’t watching closely? If you don’t, and all your neighbours do, there might not be any fuel left when your tank runs low.
Queues and stations running out of fuel became a self-fulfilling prophecy.
If fuel prices on the west side of town had doubled for that week, few people would have hurried to top up their tanks. Fuel would be cheap again when the tankers showed up. But social and political pressure kept prices from doing their work.
Economist Alex Tabarrok says that prices are a signal wrapped in an incentive. A worsening shortage results in higher prices. Those prices tell everyone about the shortage while encouraging everyone to find their own best way of responding to the shortage.
Discouraging price increases mutes the signal about scarcity while providing exactly the wrong incentive. Rather than economise on scarce fuel, people can wind up trying to buy more of it.
The shortage in Christchurch was very short term. People broadly knew more fuel was on the way within days.
The ‘pre-emptive retaliatory de-escalation action’ in Iran is radically uncertain in both magnitude and duration. That uncertainty makes prices even more important both as the best possible signal about how bad things may get, and as incentive to conserve potentially scarce supplies.
Fuel prices have gone up, considerably, in the past two weeks. They are likely to increase further, and potentially much further, depending on how the situation plays out.
The Commerce Commission has told fuel companies that price increases should reflect higher sourcing costs, while stressing that it does not control prices.
A warning that fuel could be rationed tomorrow encourages people to fill up jerry-cans and farmyard diesel tanks today. And telling fuel companies not to increase prices by too much can backfire too.
The National Fuel Plan canvasses contingency tools such as reduced opening hours, maximum purchase limits, restrictions on sales into containers, and priority supply for critical users. The plan itself notes that purchase limits do not stop repeat refilling, and that conservation messaging only works when immediate stocks are not under threat because panic buying is otherwise likely.
Other elements of the plan that could yet be invoked, like reduced hours and quantity limits on single purchases, seem more likely to induce queues than to substantially reduce demand.
Standard welfare economics makes a simple point: if government wants to help poor households, cash support is better than suppressing prices. If the market is still functioning, even if prices are high, there is no special need to reserve fuel for police. Let prices rise, then give police the money to buy fuel at those prices.
Schemes like ration coupon books, carless days and quantity limits ignore that we all face different circumstances.
I can walk to work easily; a neighbour might not be able to reasonably get to their job by public transit. As fuel prices go up, I am automatically encouraged to walk the five kilometres to the office – without any official having to guess whether I can do that or not.
As diesel prices go up, people in forestry may decide to let trees grow for another couple of months rather than cut and ship them. Trucks and ships require fuel. As fuel gets more expensive, the loads with the highest value of moving now are most likely to move. The ones that can wait will wait.
Other schemes are either blind to those differences or require coming up with a system to hear special pleadings.
But I also worry about the Commerce Commission’s insistence that prices should only reflect current supply costs.
Consider an analogous problem faced by hydroelectric generators.
The ‘cost’ of running water through a hydroelectric dam in February is that the generator cannot run that bit of water through the dam again in July. Rain is always uncertain. Holding storage back, in case inflows are lower than expected, has value.
If fuel storage tanks might not be replenished because import routes are disrupted or exports are restricted, the ‘cost’ of fuel is not whatever notional price fuel companies contract with overseas suppliers. A litre used now might mean a litre that cannot be used in June. It is possible that everything resolves itself before then. But it is also possible that things turn considerably worse. The Strait of Hormuz is less predictable than hydro lake inflows.
The Commission’s messaging risks confusing today’s sourcing cost with the value of fuel in storage. If replenishment is uncertain, the relevant cost of selling a litre today is not just what it cost to source, but the value of keeping it in reserve. That is like telling hydro generators to run the sluices in February despite the risk of a dry winter.
To its credit, the government has resisted calls to reduce the petrol excise charges that fund road maintenance. Subsidising demand during a shortage is a terrible idea. Minister of Finance Hon Nicola Willis said that targeted, timely cost-of-living support is a better response – and she is right.
Pressure to adopt terrible ideas will rise with fuel prices. Failure to let prices do their work in Christchurch in February 2011 saw pumps run dry – but only for a short period. The current crisis could be far worse. Letting prices do their work will be even more important.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
It did not work well. If you were limited to only putting a small amount of fuel in your car, why not go back home and get the second car to top that one up too? And maybe a jerry-can too, if the attendant isn’t watching closely? If you don’t, and all your neighbours do, there might not be any fuel left when your tank runs low.
Queues and stations running out of fuel became a self-fulfilling prophecy.
If fuel prices on the west side of town had doubled for that week, few people would have hurried to top up their tanks. Fuel would be cheap again when the tankers showed up. But social and political pressure kept prices from doing their work.
Economist Alex Tabarrok says that prices are a signal wrapped in an incentive. A worsening shortage results in higher prices. Those prices tell everyone about the shortage while encouraging everyone to find their own best way of responding to the shortage.
Discouraging price increases mutes the signal about scarcity while providing exactly the wrong incentive. Rather than economise on scarce fuel, people can wind up trying to buy more of it.
The shortage in Christchurch was very short term. People broadly knew more fuel was on the way within days.
The ‘pre-emptive retaliatory de-escalation action’ in Iran is radically uncertain in both magnitude and duration. That uncertainty makes prices even more important both as the best possible signal about how bad things may get, and as incentive to conserve potentially scarce supplies.
Fuel prices have gone up, considerably, in the past two weeks. They are likely to increase further, and potentially much further, depending on how the situation plays out.
The Commerce Commission has told fuel companies that price increases should reflect higher sourcing costs, while stressing that it does not control prices.
A warning that fuel could be rationed tomorrow encourages people to fill up jerry-cans and farmyard diesel tanks today. And telling fuel companies not to increase prices by too much can backfire too.
The National Fuel Plan canvasses contingency tools such as reduced opening hours, maximum purchase limits, restrictions on sales into containers, and priority supply for critical users. The plan itself notes that purchase limits do not stop repeat refilling, and that conservation messaging only works when immediate stocks are not under threat because panic buying is otherwise likely.
Other elements of the plan that could yet be invoked, like reduced hours and quantity limits on single purchases, seem more likely to induce queues than to substantially reduce demand.
Standard welfare economics makes a simple point: if government wants to help poor households, cash support is better than suppressing prices. If the market is still functioning, even if prices are high, there is no special need to reserve fuel for police. Let prices rise, then give police the money to buy fuel at those prices.
Schemes like ration coupon books, carless days and quantity limits ignore that we all face different circumstances.
I can walk to work easily; a neighbour might not be able to reasonably get to their job by public transit. As fuel prices go up, I am automatically encouraged to walk the five kilometres to the office – without any official having to guess whether I can do that or not.
As diesel prices go up, people in forestry may decide to let trees grow for another couple of months rather than cut and ship them. Trucks and ships require fuel. As fuel gets more expensive, the loads with the highest value of moving now are most likely to move. The ones that can wait will wait.
Other schemes are either blind to those differences or require coming up with a system to hear special pleadings.
But I also worry about the Commerce Commission’s insistence that prices should only reflect current supply costs.
Consider an analogous problem faced by hydroelectric generators.
The ‘cost’ of running water through a hydroelectric dam in February is that the generator cannot run that bit of water through the dam again in July. Rain is always uncertain. Holding storage back, in case inflows are lower than expected, has value.
If fuel storage tanks might not be replenished because import routes are disrupted or exports are restricted, the ‘cost’ of fuel is not whatever notional price fuel companies contract with overseas suppliers. A litre used now might mean a litre that cannot be used in June. It is possible that everything resolves itself before then. But it is also possible that things turn considerably worse. The Strait of Hormuz is less predictable than hydro lake inflows.
The Commission’s messaging risks confusing today’s sourcing cost with the value of fuel in storage. If replenishment is uncertain, the relevant cost of selling a litre today is not just what it cost to source, but the value of keeping it in reserve. That is like telling hydro generators to run the sluices in February despite the risk of a dry winter.
To its credit, the government has resisted calls to reduce the petrol excise charges that fund road maintenance. Subsidising demand during a shortage is a terrible idea. Minister of Finance Hon Nicola Willis said that targeted, timely cost-of-living support is a better response – and she is right.
Pressure to adopt terrible ideas will rise with fuel prices. Failure to let prices do their work in Christchurch in February 2011 saw pumps run dry – but only for a short period. The current crisis could be far worse. Letting prices do their work will be even more important.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
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