I recommend my readers check out this piece over the UK Telegraphon what is going on with our friends across the pond. They’re experiencing a fuels shortage to the extent that the government is being urged to begin an emergency program of rationing. The issue began when a union of truck drivers who deliver fuels threatened to go on strike, and a government official, Francis Maude, a Cabinet Officer advised people to fill up their tanks and store fuel in storage containers. Quite naturally, the people responded by doing just that, emptying filling stations everywhere. While telling the people not to panic, the British government incited a panic, and the resultant run on fuels, in a shortage so severe that first responders there are having difficulty finding fuel to run their ambulances. What we should learn from all of this are at least two important lessons, and I hope my readers will take note: Governments cause panics by their actions, but more importantly, our fuel supply is more vulnerable than most people think, because of the structure of the supply chain.
If you drive to your favorite filling station, most days there will be no problem. You’ll simply dispense the fuel, pay and depart, and there’s no fuss about any of it. What most people don’t realize is that the amount of fuel out at filling stations is based on the expected, ordinary quantity demanded, and while there may be some small amount in surplus, it’s really not much more than a day or two extra under ordinary conditions. Fuels are dangerous to store in large quantities, and EPA regulations have made the job harder, but most important is the notion of just-in-time inventory management which means retailers don’t keep more on hand than they will immediately sell under normal conditions.
The reason this matters to consumers is that it means that any small fluctuation upward in quantity demanded can quickly lead to a shortage. As we should have learned in the aftermath of hurricanes Katrina and Rita, anything that causes a shortage at the margins in one locale can quickly spread to others. If there’s a run on fuels in just a few key locations locally, it can spread like a wildfire as displaced customers shift their demand to other locations, driving those to shortage, and thus pushing the shortage around. As the shortages spread, panic takes hold, so that people descend on every location for fuel they can find.
This tells us a little bit about the psychology of the market and why such shortages can materialize for no apparent good reason, looking at the matter on a macro scale: Is there enough fuel for immediate demands? Had people simply gone on with their ordinary purchasing patterns, would there have been a serious market-wide shortage? No. The problem lies in the fact that people can be moved by fear and uncertainty regarding the immediate future. The notion that some days in the future, tanker drivers in the UK might be on strike, and might cause a shortage, was enough to cause a government official to make remarks that started a panic. Even if the strike never materializes, it will take days or even weeks for the UK to restore things to the normal flow.
What this also should remind us is that on-hand supplies at retail outlets is never nearly what the whole market might demand at once. At any one time, the capacity of every filling station is just a small fraction of the total capacity of every vehicle’s tank. When everybody goes to fill up at the same time, the situation is made evident, because the on-hand retail supply can in no way match the condensed time frame of such a move by consumers to tank-up. In the UK, they’re openly talking about rationing now as a way to restore the normal flow.
The more interesting part about this problem is the human psychology implied: When faced with potential shortages, we tend to horde in response, and this can clearly add to the problems.In the US, where we are much more dependent on fuels to maintain the course of our daily lives, commute and travel distances being so much greater, we’re especially vulnerable to panics generated by short-run, geographically-limited marginal shortages. For this reason, the US can be subject to very small-scale shortages turning into regional or even nationwide problems. It doesn’t take much. If a few gas stations over a metropolitan area run short, it can ripple outward and spread like a virus. People begin panic-buying almost as soon as they hear that there is a shortage somewhere nearby.
This is why our current situation is actually so precarious. It doesn’t take much but a day or two of delayed replenishing in distribution to cause a serious problem. This is also another reason we should seek to increase not only the amount of oil we produce domestically, but also to increase our refining capacity. The situation underway in the UK is small compared to the impact such a panic could cause here, primarily because the geographical expanse of our country means that public mass transit isn’t economically viable in most areas. In short, we need our fuel, and our lives have evolved to depend upon it. It’s bad enough when governments do idiotic things like start a panic, but what’s worse is when they’re so utterly unprepared when they happen without government prompting.
The American people should be made aware that panic hoarding only worsens the problem and increases the span of time before a situation driven by natural disasters is resolved. The goal in such a situation should be to delay purchase as long as possible, but that’s so counter to our nature that I don’t expect many people to react in perfectly rational ways. The other problem we face is political, in that too few Americans understand just how fragile this system has become, and with it, all the dependencies upon which it relies. If more Americans understood just how reliant they really are on an energy supply to maintain their standard of living, they might bring more pressure on politicians to get out of the way.