Jayne Ball is vice president and director of research at the New York Mercantile Exchange where petroleum product futures are traded.
This article is reprinted by permission from the September 1979 Issue of Commodities magazine, Cedar Falls, Iowa.
Overall supplies of gasoline have been about 5%-7% below year-ago levels on a monthly basis. Beef supplies on the other hand, have been running approximately 15% below a year ago. So why are there no beef lines?
The answer is simple:
1. Beef prices are not controlled by the government and were able to rise to a level which effectively reduced demand for beef to balance with the smaller supply.
2. The government does not allocate supplies of beef so members of the trade in the many states and localities individually were able to secure supplies by raising their bids when necessary to draw beef to even the most inaccessible corner of America.
Higher prices contributed to reduce beef consumption. Some people could not afford beef cuts, while others judged that eating beef was not worth the extra cost relative to alternative meats and poultry. But for those willing to pay the price, beef was and is available. In fact, the only times that beef is difficult to obtain is when supermarkets feature it as a sale item, drawing customers to pick up bargains.
There is a joke about a woman complaining to a grocer that he charges 10 cents more for his bananas than a competitor down the street.
“So why don’t you buy your bananas there?” asks the grocer.
“He doesn’t have any,” answers the woman.
To which the grocer replies, “When I don’t have any, I’ll sell them for 10 cents less than he will.”
The point of this rather unfunny story is that a low price is meaningless if you can’t get the goods.
Of course, beef is only one kind of meat and some will argue that alternatives to petroleum are neither so varied nor so quickly generated as extra broilers or hogs. But that is just a time factor and not a contradiction to the law of supply and demand.
It’s a very elementary fact that low prices stimulate consumption and high prices encourage conservation. This is true for every commodity, both essential and luxury items.
Very few Americans are in the envious position of not having to ask the price of goods or services before making a purchase. Most of us have to budget our money to obtain necessities of life and to, hopefully, have something left for luxuries. As a result of higher gas prices, lower income families may not be able to buy as much, but those that must have gas will budget their resources to get it. If prices rise to a point that makes it difficult for the shopper to justify an extra trip to the supermarket to buy one or two items forgotten, the trip won’t be made.
Carpooling will increase substantially for business, shopping and pleasure. Use of mass transportation, where available, will also be greater. In short, conservation would be promoted without coercive government measures, such as odd/even gas sales, rationing or other equally ineffective actions.
No Instant Solutions
Decontrol of oil prices and the abolition of the government allocation system will obviously not bring an overnight increase in available supplies of petroleum. There is considerable lead time necessary to find and develop new sources of energy. The near- term benefits of allowing prices to rise to levels which reflect the balance of supply and demand are the end of gas lines, the voluntary cutbacks in consumption for non-essential purposes and the assurance that gasoline will be available for those who must have it, albeit at a higher price.
Long-term, decontrol will enhance investment in energy. Downside risks in this industry are great and limits on prices or profits can only discourage the inflow of capital into this vital area.
The answer to our energy problems may not be oil. The profit motive has been responsible for discovery of many new sources and the better application of known re sources. Some presently known sources of energy could become economically feasible in a free market, and competition would likelyresult in improved and cheaper means of refining.
Higher prices for beef increased cattle ranchers’ profits. As a result, ranchers are once again building herds, and the outlook for supplies for 1980 is improving.
Likewise, the potential for profit can draw capital into the quest to produce more energy in America. But whether the source is oil or some alternative, the answer to our energy problem does not lie in increased government involvement nor in confiscatory taxation of oil companies.
Just as the market adjusts to changing supplies of beef higher prices in times of scarcity and lower prices in periods of heavier production—so, too, can the free market assure the orderly distribution of energy supplies.