Petrol shortages show that, for once, fuel prices were too low last week

LAST weekend, before my pregnant wife drove to Devon with our young daughter, I wanted to fill up the car with petrol. Unfortunately, the filling stations near to our house either had lengthy queues spilling onto the road or had run out completely. I also know a local taxi driver who was unable to fill up and was therefore put out of work by the sudden shortage. It was a stark reminder that we cannot take economic coordination for granted.

What caused the chaos? The threat of strike action by tanker drivers led to ministers advising motorists to stock up on petrol. This caused panic buying and a general atmosphere of uncertainty. In many ways it echoed the banking crisis in 2008 – politicians’ attempts to handle the emergency actually made things worse.

Basic economics tells us that when there’s an increase in demand (due to panic buying), or a reduction in supply (due to a strike by hauliers), prices will rise. This signals a shortage and encourages two important responses. Firstly, it causes consumers to be more economical in their use, and look for suitable alternatives. Secondly, it rewards companies that are able to supply the market either by diverting resources from other locations or by increasing capacity.

The public often sees this reward and considers it unfair. Profiteering isn’t popular and “price gouging” is in many cases illegal. This is perhaps why petrol stations didn’t raise their prices. But it’s counterproductive. There’s no point keeping prices down if there’s nothing left to sell.

There are only a few ways in which scarce resources can be allocated. Socialism claims to allocate them based on need, but this runs into an insurmountable problem – who is to determine “need”? Does the little old lady who hardly uses her car need a full tank of petrol? Does my wife need to go to Devon? Does the taxi driver need to work? Who gets to decide?

This is why in practice socialism allocates resources based not on genuine need, but on who shouts loudest. The central planners and the well-connected will do OK, but the rest of us go without. To avoid relying on discretion, a common method of allocation is based on queuing. In this situation, the resources go to whoever is willing to spend time waiting. There is an element of fairness to this, since poorer people are more likely to be willing to waste time queuing. But there is also an element of luck – resources go to whoever happens to discover a small queue, and is able to get some petrol before it runs out.

The benefit of letting prices rise is that it reveals the intensity of people’s preferences. It may mean that some people balk at the price and decide not to fill up, but that is the point. The price would be a true reflection of the increased value of petrol, and only those who really need it would be willing to pay for it. Taxi drivers will take a hit, and petrol stations will have a windfall. But don’t let a discussion about fairness interfere with the primary problem of allocating resources. If prices can’t adjust, don’t be surprised by chaos.

Anthony J. Evans is associate professor of economics at London’s ESCP Europe Business School.

www.anthonyjevans.com

Email him at anthonyjevans@gmail.com