The International Monetary Fund (IMF) has had a rather controversial history. The IMF is sort of an economic policeman. And, as the song goes, a policeman’s lot is not a happy one. Picture an indebted and impoverished country that has been pillaged by its leaders enough to collapse into insolvency. That’s when the IMF’s bankers and economists get to fill a few extra pages of their passports.
Any medicine for such sick patients is unlikely to be pleasant. And potentially unwelcome, too, when not every previous patient has gotten better. Even if they did a splendid job and made everyone a relative rags-to-riches success like South Korea or Costa Rica (not IMF rescue subjets), the IMF probably wouldn’t have crowds on cheering admirers throwing garlands of flowers in their path as they emerge from passport control.
I believe it was in Tunisia that an interesting phenomenon was observed. The IMF’s aim was to gradually increase the price of bread to reflect the world price for wheat. Being sensible chappies, they staggered the price rises. The first went into effect, the market price rose, people still bought bread. The second went into effect, up went prices. The third happened, and there were riots on the street.
What this illustrates is the breakdown of free market economics. Lawlessness undermines the foundations of freedom of contract, price discovery and open trading.
Which brings us to the most excellent talk from Professor Deffeyes at WTF!?! last weekend. In a nutshell, the Professor demonstrated that world oil production is almost certain to peak next year, and then begin a steady decline over decades to come. Which is a bit of a disappointment if you’re a newly minted member of the Indian or Chinese middle class hoping to buy and run your first car. Because richer Americans, Japanese and Europeans are going to be sucking up what’s left at ever increasing prices.
The invitation that David Isenberg extended to Prof. Deffeyes was particularly cunning. At first sight, you have to ask youself why we’re looking at oil production at a telecom conference. Then the talk starts to get interesting and you think, “OK, this is interesting enough I’m glad he came, it was still worth the money.” But what we were really getting was a lesson in supply and demand. And what happens when supply goes keeerunch. The obvious answer is that prices rise. But here’s the non-obvious bit from my notes:
One possibility that economists love is that we will ration by price. Nixon govt fixed the price of oil. Ration by inconvenience – lines for gasoline. End of WW2, Roosevelt had ration coupons. Will be some form of rationing. What happens when gap between supply and demand opens.
Aha! So last time this happened the price mechanism was only allowed to go so far. Before long, the clamour to “do something” by those disadvantaged by high energy prices became too much. And rationing was de facto introduced. (The same thing happens with the National Health Servce in the UK. Extended waiting times are an alternative means of rationing without the political pain.)
So what we see is a transition from a market economy to a political economy. In the former, production and prices depend on what you offer in return. In the latter, it’s down to who knows whom and has influence. So oil, even in the richest countries, can behave like Tunisian bread. At some point the assumptions of a well-behaved market go wobbly and you’re left with a mess.
And there’s more. The oil industry clearly has lessons to teach telecom. The current strategy of most incumbent telcos is to restrict supply, much as any good monopolist will do. But oil and telecom don’t exist in different worlds. They are, to some degree, substitute goods. Instead of shipping goods around the world at each stage of production, you can ship the knowledge of how to process them. People can telecommute and teleconference. An oil crunch means we’re going to need a lot more telecom.
Which in turn means we may see an intensification of the political economy of telecom. In many ways, the core competence of most large telcos and cablecos is lobbying. In the US there is the Telecom Act, sundry FCC rules, the allocation of broadcast spectrum, franchising rules, and so on. Each acts to make entrance of new competition harder. Even if the label on the tin says the opposite. I’ll say that again. Many telcos only make money from their copper landline operations, and that only happens because the political system makes it that way.
This doesn’t paint a happy picture. On one hand you’ve got a potential explosion in demand. And on the other you have incumbents dearly set on restricting supply (Where’s The Fiber!), and the political leverage to make it happen. And if Tunisian bread is a guideline, the result is going to be a riot.
UPDATE: More comment here from the Angry Economist.
UPDATE: New York Times article here
UPDATE: The “peak oil” hypothesis is just that — a disprovable theory, not a fact, as this article (pdf) describes.
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