2008 February 17 Sunday
Price Controls And Export Controls Signs Of Commodity Shortages

Price controls around the world are becoming much more noticeable as a result of the run-up in oil prices and coal prices. Countries with energy price controls are getting hit by power outages rather than just simply higher energy prices. These price controls in more socialist countries (e.g. South Africa, China) could limit their usage of energy and therefore leave more fossil fuels for the rest of us. However, in big oil exporting countries (e.g. Venezuela, Saudi Arabia, Russia) the internal price controls cause big internal surges in oil consumption and hence less oil for the rest of us. So price controls cut both ways. Finally, I wonder whether the willingness of the Chinese leaders to use price controls will ultimately limit Chinese economic growth. First off, the mandarins in Beijing are using price controls on electricity and food to lower galloping inflation.

Beijing's resort to command economy decrees has not been confined to electricity alone. Beset by inflation galloping at a decade high of more than 6 percent, the government has steadily widened price controls, finally freezing all food prices last month as well as clamping limits on fertilizer prices and raising price supports for rice and wheat.

What do you suppose price controls on fertilizer will do to the supply of food? Will the Chinese government mismanage the Chinese economy into chaos? If the Chinese government is so afraid of mass discontent due to inflation that the mandarins feel the need to resort to price controls then the coming world decline in oil production is going to hit China much harder than it needs to. The Chinese will make a bad situation even worse if they try to mange through the crisis using price controls.

The controls are meant to shield China's poor and working classes, who spend up to half their incomes on food. But the inflation spike is blamed on shortages of pork and grain, and economists warn that putting a lid on prices just shifts the hardship to farmers, discouraging them from raising output, which would bring down high prices.

The inflation in China functions as an incentive for the Chinese leaders to let their currency appreciate. A stronger currency will lower their cost of imports for energy, food, and minerals. But a rise in Chinese currency will also increase the price of Chinese goods and therefore increase inflation in Western countries.

Price controls caused cascading shortages in China.

Power executives and government statements attributed the electricity shortfall this winter to a confluence of problems. Many of the problems appear to have their roots in the government’s imposition of a long list of price controls in recent months in an attempt to tamp down inflation, which reached 6.9 percent at the consumer level in November.

Trucks did not deliver adequate coal stockpiles to power plants before winter snows arrived in northern China, partly because of nationwide diesel shortages. Refiners had cut back on the production of diesel because price controls were forcing them to sell the diesel for slightly less than the cost of the crude oil needed to make it.

The Chinese government even imposed export tariffs on agricultural products.

In January, the National Development and Reform Commission announced tightened supervision of prices for grain, edible oils, meat, poultry, eggs, feed and other items in both wholesale and retail markets.

This followed the announcement in late December that from January 1 the government would slap taxes ranging from 5-25 percent on exports of a range of products including wheat, corn, rice and soybeans to try and ensure stable food supplies at home.

The actions appeared to be stoked by memories of the widespread protests that resulted from the government's clumsy handling of food price controls that led to inflation of around 50 percent in the summer of 1988.

The Chinese government imposed an outright ban on coal exports.

BEIJING, Jan. 26 -- China's Transport Ministry yesterday ordered ports to temporarily stop loading coal for exports as the country struggles to meet domestic needs amid mounting power shortages.

The availability of internationally tradeable fossil fuels energy will decline much more rapidly than the total extraction of fossil fuels from the ground. Governments won't hesitate to cut exports to supply domestic industry and populaces

Price controls and exports controls are signs of the times. Commodities prices are rising rapidly. The government of Pakistan has banned private sector flour exports.

ISLAMABAD, Jan 22: The Economic Coordination Committee (ECC) of the cabinet on Tuesday banned the export of flour to Afghanistan through private sector to stabilise flour price in the domestic market.

South Africa really takes the cake for sheer stupidity. Price controls combined with rising prices have created power shortages. Electric power was cut to coal mines that extract the coal that is needed to generate electric power.

Some of South Africa's coal mines have resumed production after being shut down on Friday because of power cuts.

Coal is used to generate about 90% of electricity supplies at state power company Eskom.

But the main gold, diamond and platinum mines remain closed. South Africa is one of the world's biggest producers of platinum and gold.

South Africa doesn't have much going for it aside from its mining industry. I already expected South Africa to decline before considering the effects of Peak Oil. White flight makes that a certainty. But a maladaptive response to Peak Oil could make the decline much faster. Industries that depend on South African platinum ought to start working hard on substitutes.

More generally, Peak Oil is going to widen economic differences in the world. The messed up places with low social capital will respond much less adaptively than the smarter places with high levels of trust and cooperation. Plan accordingly.

Share |      By Randall Parker at 2008 February 17 02:04 PM  Economics Energy

mike said at February 17, 2008 8:12 PM:

I think you need to distinguish between the messed up countries and the really messed up countries.
Resource rich middle-income countries like Argentina, Russia and the Ukraine seem to be doing relatively well, although they may be vulnerable to further boom bust cycles.

However, African, and poor South American countries, will struggle to take advantage of any advantage they have in terms of natural resources.

Kenelm Digby said at February 18, 2008 6:00 AM:

You've got to hand it to the Chinese.
Consistent growth, year-in, year-out at around 11% per annum is really quite a feat - enough to stretch any economy right to the limit of what possibly can be achieved by human effort.It is very easy to read the figure '11%' on a computer screen, but actually to have any idea of the sheer magnitude of effort and wealth hidden in that number is another thing.Think of every street in the USA, containing 1000 houses, say, having another 111 houses added each year to get some idea of the immensity of the Chinese achievement.
All that considered, their inflation and shortages are trivial matters.
I believe in one year, 1964, Japan actually grew by 16%.
Imagine if the US economy actually grew by 6% in one year - can you think of how inlation would gallop out of control?

averros said at February 18, 2008 5:33 PM:

> Price Controls And Export Controls Signs Of Commodity Shortages

Nah, they're signs of total ignorance of basics of economics, as exhibited by the ruling elites.

It's just plain old mercantilism. Didn't work for French monarchs, doesn't work now. The only cogent argument in favor of price and export controls was succintly offered by Louis XV who famously noted[*]: "Apres moi le deluge".

[*] the attribution is not proven.

averros said at February 18, 2008 5:51 PM:

> Imagine if the US economy actually grew by 6% in one year - can you think of how inlation would gallop out of control?

When the real production grows and the amount of money remains the same, the prices fall - because for the same amount of money there's more goods on sale. The effect is quite visible in the industries with highest rates of growth (i.e. microelectronics - check the prices per transistor).

Inflation is simply an increase of amount of money by creating money out of thin air by the central bank (i.e. Fed Reserve, in US). The only purpose of inflation is hidden transfer of wealth from existing holders of money to central bankers and governments supervising them.

The only way inflation can gallop out of control is when enough fiat money is created to cause loss of confidence in holding any such money - so holders start to seek to exchange the fiat money for any real goods or other currencies as soon as possible, causing panic buying and scarcity of goods, driving prices even higher, causing even more panic buying, and finally resulting in irreversible monetary collapse. This process is known as hyperinflation.

Needless to say, this process is extremely damaging to the economy since it destroys price signals needed for economic calculation, and because it wipes out monetary savings, thus depriving a lot of people of their safety reserves and of the ability to invest in production, thus starving economy by the scarcity of capital.

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