Posted by: graemebird | May 28, 2008

Fuelwatch, Bloody-Fuelwatch.

If you doubt that the economics profession is seriously dysfunctional in this country just consider the following.

1. Some dumb-economists would have had to recommend this scheme to the politicians.

2. Its taken the economics profession all this time to form a consensus against it, and too late to stop it from being implemented.

Now by the way. Its wasn’t immediately some scheme that we might expect the laity to shoot down. At first glance it might appear to be logical to the laity. But really. We would expect better from people in the business. Jason Soon gets a hard time from me only because I’ve argued with him about a lot of things and he hasn’t come around. But he was actually very good on this matter. He didn’t have the immediate visceral hatred of the scheme as one would hope for. But he was quicker than most of the rest of them to realise that the scheme was pretty damn dubious.

But the rest of them really have only just come around. We have blogs now and we can track their tepid responses. I however was furious at the idea right from the start.

Here are my comments about Fuelwatch when the idea was first proposed. But remember that the economics profession were too slow to shoot this one down:

GMB Says:
April 17th, 2008 at 1:58 pm
PERVERSE is the wrong word Jason. It will have terrible effects because it is a flagrant violation of property rights at the most competitive part of the supply chain.
Its typical thief-economics superstition and the belief in something-for-nothing. The effects will be all bad. But none of them will be perverse.
Since this does nothing to increase the supply and quality of the goods in question it is totally superstitious. It is unjust as people have their whole fortunes riding on these outlets. It will cause the investment in building new stations to stop, and the old ones will be sold off at discount to those who happen to have less debt.
The dual effect in the long run is therefore to less competition.
In the short run we might be able to get cheaper gas at the expense of bankrupting a few people. In the longer run then that the margins will be stripped from the retailer and go back to the big oil companies for as we have seen this does nothing to increase supply.
The margins will gravitate back to the retailer but only when the retailer becomes more market-concentrated as these moves will ensure.
The bureaucratic costs will eat up gains even in the short runs. Other costs will come from the afforementioned loss of cheap times, extra fucking queuing, extra driving around for the cheaper stuff.
This is an appalling disgrace and the economists who advised in its favour must be named and shamed.
When we look at competition we must look at the flow of capital over time.
GMB Says:
April 17th, 2008 at 2:06 pm
Its not the ignorance in economics that makes me blue in the face about this its the injustice.
Imagine being up to your eyeballs in debt trying to pay off your investment here. Keeping your business looking good and no shortages. Putting the price up to avoid queuing and shortages and only at these hours here and there when you do this making any significant margin.
And then they take away your ability to flexibly price hour in hour out in that way so the service is always good and no rationing.
This is just such vandalism. You really want to go in there and start kicking people in the nuts.
And where is our extra supply. No fucking thought to extra supply. No new liquified-coal plant. NO nuclear plant.
Just fucking vandalism.
You cannot alter the price without increasing supply.
You can just destroy one part of the supply chains margins in favour of anothers.
Who advised this? Which economist advised this? If he’s in Sydney I’ll go and see him personally.
Pricing on the hour is important. Pricing is not price. Pricing is the ability to be flexible. To guarantee good service and not have cars banked up idling. To be able to fire-fight problems to keep the supply up even under stress.
Damn these bad economists.
Damn them all to hell.
GMB Says:
April 17th, 2008 at 2:21 pm
What are they saying at Club Troppo. Are any of those bastards supporting this. I cannot even view it now.
Is this all Gruens doing?
“It then found that the average of the price margin reduced by a statistically significant amount for Perth relative to the eastern capitals in the time since the introduction of FuelWatch.”
Whats happening to capital investment in these outlets and in others? Whats happened to the price of the stuff in the store??
What about off-peak discounts and things?
This is just crap. Justifying something-for-nothing thief-economics with a static-equilibrium assumption and dumb ideas about statistics.
Witchdoctors and boneheads. Upwardly mobile in our society it seems.
GMB Says:
April 17th, 2008 at 2:28 pm
“As I see it the bad thing potentially is them being forced to fix the price for 24 hours, but that also makes me wonder why do petrol retailers need to update prices so often?”
To keep the cars moving and the fuel there. To make it worthwhile to never run out of supply and to not have people waiting.
They have a queing problem and a supply problem as well. They cannot have tankers showing up al that much when the roads are clogged with cars.
You might make your margins to avoid the queues but sell at near cost to keep your customer loyalty when you have no queuing or supply problems.
So you want flexible pricing to stop the roads entire clogging up. But your average price simply cannot come down without extra supply.
This is evil is what it is. The dead-weight loss of driving extra and queuing. What a fucking mess it will be.
And then the oil companies profits can only get bigger and we’ll spiral towards greater and greater stupidty.
GMB Says:
April 17th, 2008 at 2:40 pm
I just explained it Edney.
If it was me I’d be making the bulk of my profits precisely when I was having queuing problems and supply problems.
But to establish customer loyalty I’d be selling on thin margins when no such difficulties exist.
But clearly you need to make good margins at least some of the time since you need constant capital reinvestment.
Nothing good can come out of this economics-supersition.
Any improvement in alleged a-symmetrical information will just strip the retailer of margin and hand that to the oil company. Since there is no new supply.
Where’s the notions of good service, staff training, improving your outlet, customer loyalty and human relations in this blinkered analysis of whoever reccomended this.
And how about the potential for subtle falls in the quality of the fuel.
This is madness.

GMB Says:
April 18th, 2008 at 12:27 am
This issue shows up all the mental-set faults of mainstream economics.

1. THE FOCUS ON RETAIL. The neoclassical-gone-native/Keynesian ascendancy, can just barely see business to business operations. But mostly they are thinking retail. This is part of their GDP rather than GDR focus. So they are thinking of price signals but consumer prices loom large for them, whereas producer prices fall vaguely into the background.

2. The tendency to take the balance sheet but not the income statement. Or to put it another way to take TIME AND CAPITAL MOVEMENTS OUT OF THE SITUATION. They might know from barely functioning general knowledge something about the reinvestment of revenues. But it is in a recessive part of their subconcious that this intelligence foggily emerges only to dissapear again.

3. The belief in something for nothing. Prices simply CANNOT be reduced in any meaningful way overall without an increase in SUPPLY. Hence the shutting off of the business owners flexibility to use price as a rationing mechanism will create untold dead weight loss and no price reduction at all in anything more than a period of a few months. It quite literally CANNOT reduce prices to the consumer overall. This is because THERE IS NO FUCKING SUPPLY INCREASE.

It doesn’t matter what bloody bloody bloody bloody bodgy statistics you knock up. If there is no extra supply their simply cannot be any overall price reduction for the love of statistics-mystics everywhere.

Now a little bit later I’ll go through the likely effects of this scheme as well as try and help you guys take a wider view of the power of distributed price signals. Because its not just about prices at retail. Producer prices do double duty and are more important in the overall scheme of things.

GMB Says:
April 18th, 2008 at 12:35 am
“Why would we want to abolish a fuel tax of 41.9573 cpl?”
That would be just magnificent. And registration fees as well. But claw back about a quarter of the lost revenue in iterative targeting of road congestion. In the expansion and smoothing out of the e-charge system.
Of course any such charges must be sunsetted.

GMB Says:
April 18th, 2008 at 12:40 am
51. No you have no idea Mark. You are a prime example of the problem I’m talking about. Producer pricing does a great deal more duty in terms of decision-making then consumer prices.
Producer pricing is the real deal. Because if you are piggy in the middle and you deal only with producers before you and after you and on all sides then pricing effects decision-making 360 degrees.
But the significance of pricing for producer-to-producer relations is far more fundamental then at the consumer level. Since along with price COMES THE RESOURCES TO TAKE ACTION AND TO DO THINGS.
Prices bring not just information but productive power. This is something that Hayeks way of expressing things plays down horribly.

GMB Says:
April 18th, 2008 at 1:14 am
“Take a warts and all approach. Yes fuel retailers operate at excess capacity.
Yes it allows them to use market power.”
Excess capacity reduces their ability to exercise market power.

(site diety sez: some cutting here)

Its oversupply of capital that reduces prices and margins. Not “efficiency of capital” but oversupply.

(site diety sez: some cutting here)

GMB Says:
April 18th, 2008 at 2:38 am
Not going to happen.
You are confusing the fact of the vast supply we have, with the daily output.
Its daily output that determines prices and not the resevoir.
The enviromentalists have cut off everything now that would bring down the price to about 40USD.
I’m telling you man. We are in serious trouble and the price will beat 125USD by August.

GMB Says:
April 18th, 2008 at 11:09 am
Can you attempt not to misrepresent my position?
Excessive capital in one part of the supply chain makes that part of the supply chains operation more productive, ie cheaper. Yes its good.
If there is heaps of suppliers and heaps of capital their part of supply will be cheap and they won’t have much market power. Heaps of capital is what brings prices down.

An individual with heaps of capital might have market power. But if its his part of the supply chain that is over-capitalised then there will be low margins at that end of the industry.

Its the lack of capital at the other end of the business that cause the high prices. The old drilling rigs. The inadequate capital for deep-sea-drilling. The insufficient nuclear plants. The lack of coal liquification plants next to them. The inadequate capital to exploit all the Antarctic fozen gas on the bottom of the ocean. And that gas can help us produce tar-sand oil more quickly.

Rampant debasement obscures for us the reality that its excessive capital that BRINGS DOWN THE PRICES.

Mark Hill Says:
April 18th, 2008 at 11:14 am
Now Graeme, I don’t disagree with you that more capital investment is good or that overall excess capacity isn’t good.
Just tell me how excess capacity doesn’t give retailers market power.
GMB Says:
April 18th, 2008 at 12:21 pm
It will for an individual retailer. But not if the retail end is highly capitalised.
Market power goes to where the supply-chain is undercapitalised. To the individual firm that has a lot of capital in that end of the market that is undercaptialised.
Exxon has a great deal of capital at the end of the business that is chronically undercaptialised.
GMB Says:
April 18th, 2008 at 12:31 pm
Suppose I own a service station. I have some capital. Its a highly capitalised service station.
Now the government comes along and creates undercapitalisation. They close down three quarters of the service stations in my city. Now the cars are queuing up. So suddenly I have market power because my end of the business is UNDERCAPITALISED.

I myself have capital and thats why I have market power. But my end of the business is UNDERCAPITALISED. I am overcapitalised if you like. Not really. But I have capital. But my end of the market is undercapitalised.

Now I rise my prices to dissipate the queues. I have now good margins. Some of it comes off the consumer and some of the other members of the supply chain.
So this outrageous scheme will bankrupt some of the service stations and eat up their margins in the short run. But their margins will return because of the undercapitalisation this horrible scheme will cause in the longer run.

GMB Says:
April 20th, 2008 at 5:01 pm
Yeah great angle Terje. Ånd I would reccomend to the service station owners that they get the collusion going right away to protect their margins and some sort of reinvestment from the looters with their ridiculous schemes.

But I ask people. What is wrong with charging at tiny margins when there is not much queuing and your inventories are high, and charging at very strong margins when there would otherwise be queuing and your stocks are getting towards the low side?
What do people have against sound business practice in a flagrantly competitive part of the supply chain?

This will be a much worse scheme in Sydney and Melbourne then it is in Perth. Last time I was in Perth you could still drive into town without congestion most of the time and you could usually get a park.

This vandalisation price-fixing scheme will just add to congestion and angry motorists in a bigger city.

And where’s the extra supply? And when people are talking about this scheme in the media why are they not talking about the lack of extra supply attached to this disgraceful scheme?


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