Our relationship status with oil has always been ‘complicated’, ever since we found out we can use it to propel ourselves forward and light our homes.
For us Mediterraneans, oil is not just a matter of convenience, it is cultural when we consider our love of driving (perhaps we cannot help but enjoy the drama). Consider the Italians and their stereotypical love for cars – data shows that Italians rank 11th in the world in terms of car ownership per capita. Now consider that Malta ranks above the Italians at ninth place. This despite the fact that Malta is smaller than Italy, the Italians earn more on average and cars are more expensive.
Yes, driving is a big deal here (just in case it needed pointing out).
I know then that I must proceed carefully with what I have to say. My object here is not to dissuade anyone from driving; that would be hypocritical: I drive my car and I enjoy driving it. I do not use public transportation. I do not cycle around. As a man humbly pointed out to me on the back of his T-shirt while riding his bicycle in traffic, I am “part of the problem”. For some reason, condescension is still not a good tactic to winning hearts and minds.
This then is more of a reminder than an appeal; the recent panic concerning fuel has reminded me to remind myself every now and then of some economic truths. We are all concerned with having the price of fuel as low as possible. Every additional cent it costs is a step in a march against our very national identity and every step it takes is likelier to send us out marching in a counter protest.
The petrol station owners argue that their margins are too low. The government argues that an increase in their margins would come at the expense of an increase in the cost of fuel for us voter-consumers. The owners argue that, instead of increasing the price, the government can reduce their costs and keep the price unchanged. Who is right?
The government is right but the reasons why are non-political and nuanced (read: boring and complicated). Let’s assume that the government went ahead and increased the margins by cutting their costs. One man’s cost is another man’s income and how do you suppose the government will make up for the lost income? Either through increased taxation or a higher deficit.
I can hear some protest: But what about the surplus? Surely, the government can afford to have less income. If there is a surplus, this kind of spending squanders it and we would do well to remember that it is good policy to save when times are good because they invariably turn sour – that’s life. However, we need to move beyond this specific situation to keep in mind a general principle. What is this principle? If you want to sound smart, you can call it the second law of thermodynamics. If you want to be understood, you can say there’s no such thing as a free lunch. We cannot create something out of nothing: it takes sweat, blood and tears – not just policy and legislation. Margins cannot be increased out of thin air, you have to innovate or make some hard cost-cutting decisions (easier said than done , which is my point exactly).
Profits cannot be ordered into existence
Petrol prices cannot be lowered or increased by bureaucrats without consequence. Profits cannot be ordered into existence. Whenever we appeal to a government we think it is omnipotent but a government is made up of men and women just like you and I. It is not a question of competence; it is a question of inherent human limitation (if you want to sound really smart, call this ‘bounded rationality’). Always ask yourself what the cost is, be you politician or plebe, policy wonk or armchair economist.
Let’s go one step further. You calculated the costs but remember that these are distributed over time in the future. We have inherited our forefathers’ problems (though they were indulgences from their point of view) and our children will eventually inherit ours. We would do well to remember this because it is so easy to forget.
Making matters worse is the fact that these little adjustments really do have an effect (if they did not we would not bother with them). Lowering the price of fuel increases our consumption of it or, at least, keeps it high. Raising it lowers our demand; it is basic demand and supply. We have been given a way of allocating the use of resources in prices that emerge from the literally trillions of decisions of billions of people but disregard the power of this ‘invisible hand’.
All things considered, this particular instance is not a big deal (I am a dramatic Mediterranean, after all) and it will not make or break us. Then again, that chocolate bar you ate after the gym will not make you fat. It is the 5,000 bars you have eaten since you were a lean teen that did the job, one at a time.
Yes, keeping markets free entails pain, sometimes serious pain. James Maynard Keynes would argue we need to lessen that pain now because “in the long run we’re all dead”. That is a conversation worth having and the debate of striking a balance between the present and the future is a lifetime subscription deal.
Sometimes, though, I just wish we would learn to stop worrying and love the prices.
Matthew Farrugia is an economist.
This is a Times of Malta print opinion piece
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