Thursday, October 06, 2005
“Supply and Demand” Alive and Well
The call has gone out across the nation, in the wake of hurricanes Katrina and Rita, to conserve. In an article on The Drudge Report (“Americans asked to drive slower, conserve energy” by By Kevin G. Hall, Knight Ridder Newspapers), “U.S. Energy Secretary Samuel Bodman urged Americans Monday to drive slower, turn down the thermostat and conserve energy…”. Sounds good, but…
I like to save a buck as much as most people. Unfortunately, economics isn’t that simple. Reduce how much you drive, and they’ll reduce how much they refine. Turn down the thermostat or install a more efficient furnace, and they’ll raise the price of a “therm.” It’s a balancing act called “Supply and Demand.” So, what do we do?
First, R E L A X.
Panic is always to the panicker’s disadvantage and to the calm person’s advantage.
Remember the scene from “It’s a Wonderful Life”? There was a bank run. People were suddenly convinced that their money was at risk in the building and loan. Jimmy Stewart tried to explain that the money they had deposited with him had, in turn, been invested in loans to others, which would be repaid with interest. Some people listened to him. Others didn’t. When Old Man Potter (Lionel Barrymore) offered to buy up shares people held in the building and loan for cents on the dollar, some took him up on it, thinking something was better than nothing. They were wrong.
Panic caused the run. Customers got only a fraction of their money back. And people like Old Man Potter won, ending up owning more of the town than before.
Similarly, people see gas prices at the pump going up. They panic and rush to fill their car’s tank. The station owner may panic and think he has to raise his price further to slow down demand. People panic more and rush in more.
It’s a vicious cycle.
If they, instead, remained calm, said to themselves that they didn’t really need to top off their tank right now, that the price may be going up because of the weekend (which happens a lot around here), then they will not artificially inflate demand by panic-purchasing.
An article this morning on The Drudge Report is a good illustration that this works. In “Oil Hits Two-Month Low on Falling Demand” by Brad Foss, stated:
New data from the Energy Department show that fuel consumption over the past month declined by almost 3 percent compared with last year. Analysts attributed the trend to soaring pump prices and a slowdown in economic activity, particularly among Gulf Coast states that were affected by Hurricanes Katrina and Rita.
This shows that people are not panicking and topping off their tanks.
Foss continues:
Gasoline demand over the past month was 2.6 percent below year ago levels, the Energy Department said Wednesday in its weekly petroleum supply report. Demand for jet fuel and diesel were also lower over the same period.
and
Societe Generale [sic] said in a research note Wednesday that the decline in demand over the past month was twice as large as the usual end-of-summer dropoff and it expects to [sic] the trend to continue, even if prices fall.
Bottom line: Stay calm. Don’t rush to buy gas because you hear a rumor that prices are headed up or that there is a shortage. But don’t expect prices to stay low just because you don’t drive to the grocery store. Nor do you need to rush out and trade in your SUV for a hybrid car. If demand goes down, supply will go down by necessity to keep prices up. That’s economics.
Got errands to run now. See you later!
Copyright © 2005 A.C. Cargill
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