Higher prices are supposed to encourage more world supply. It's standard textbook economics. But what happens when, instead of export-oriented global firms, it's governments that control supply. They may not respond to price signals the same way as profit-maximizing companies. In fact, they may respond in the exact opposite way.
Instead of soaring food and energy prices encouraging food and energy producers to export more, they may export less and divert more of their output to domestic markets. The reason is simple: to keep domestic prices from matching soaring world prices.
When it is luxury consumer good prices, governments aren't compelled to intervene. But when it is food and energy prices, the political pressures become immense. They are so immense you can toss your economics textbook out the window.
During the food crisis of 2007 and 2008, record grain prices should have pulled food supplies out of world granaries like never before. Instead, no less than 29 food-exporting countries responded by banning food exports and kept their crop production for a hungry domestic market. As a result of that diversion from export markets, food price increases in those countries lagged well behind the ascent in world prices. Economists may not have approved but the populace did.
Of course, the loss of supply from those countries made world food prices climb that much higher. And food-importing countries that secured supplies, quickly started to hoard them in anticipation that more food exporters would decide to keep their crops at home.
Now we are starting to see the same pattern of export restrictions emerge in the energy industry.
Growing fuel shortages in Russia have prompted the world's largest oil producer to effectively ban gasoline exports, imposing a prohibitive 44-per-cent export tariff on them. Meanwhile, Beijing has suspended exports of diesel fuel indefinitely in anticipation of surging domestic fuel demand during the coming peak summer season. That means places like Singapore and Vietnam have to look elsewhere for their fuel.
In April, China's largest refiner, state-owned Sinopec, halted all exports of refined oil products. This month, China's state planning agency, the National Development and Reform Commission, told all state oil companies to stop exporting diesel. The official reason was "to maintain social stability and promote economic development". Apparently refinery margins aren't part of the equation.
The export restrictions in both countries are designed to prevent domestic refineries from taking advantage of much more attractive refinery spreads for gasoline and diesel elsewhere in the world.
So far, these restrictions have only affected refined products such as gasoline or diesel. But it leaves you wondering where this is heading as energy supplies becomes scarcer.
Will triple-digit prices soon halt the free flow of crude oil the same way soaring crop prices halted the free flow of food?