A year after our prediction, #gasshortages are here

Exactly a year ago on Friday in an article titled “Say goodbye to cheap, reliable, and accessible LPG supplies” we argued that:

Now the government has decided to meddle with the liquid gas supply chain, so say goodbye to a wide distribution network, reliable supply, and ultimately cheap prices for your gas hobs or gas heater.

Here’s the thinking.

  1. Over time government destroys Eskom’s infrastructure, so now SA sits with a rationed electricity supply and rising electricity prices.
  2. Homebuilders and owners at the margin prefer to switch to Liquid Petroleum Gas (LPG) appliances such as gas hobs and heaters as these (while at times more expensive) will be more reliable than the electricity supply because the market supplies LPG readily.
  3. Now government sets its sights on the booming LPG industry’s margins as a result of this increased demand, inevitably causing a market failure. Surely if the industry is so ‘profitable’, more LPG players would enter the market that would erode these so-called ‘excessive profit margins’? [emphasis added]

And as freeman explained in the same article:

The joke about these policies is that government genuinely thinks it is being clever by doing this.  If they had even a smattering of intelligence and economic understanding they would know that price ceiling policies have been tried by different governments in different parts of the world on different products for millennia, and each time the result is exactly the same: market failure, shortages, entrepreneurial failure, business shutdowns, and eventually the emergence of ’black’ markets. Do our leaders really think it is possible to ‘decree’ a price lower on a sustainable basis?  What do they think the pricing mechanism is? Do they even understand what a price is?  I doubt it. [emphasis added]

Obviously, to us and our readers it really is no surprise that John Robbie earlier tweeted:

Coming up shortly we chat to @chrisyelland about all these gas shortages. Why is there not enough gas to serve consumer demand?

It’s all a result of the maximum regulated price that has been set too low, John.  By fixing prices too low, people have overconsumed gas.  Instead of prices being allowed to rise to match supply and demand, overconsumption was government mandated.

Gas suppliers, distributors and marketers aren’t allowed to sell LPG gas at a price above government mandated rates, otherwise they would.  Now they’ve run out of stock and to keep selling by importing more expensive gas, they will run at a loss.  Obviously this isn’t going to happen. Business Live explains that

The department [of energy] this week warned suppliers and retailers who sold LPG and charged more than the capped price they could face a fine of up to R1-million or face up to 10 years in jail.

Did you get that? A R1 million fine or a decade in jail if you’re caught selling gas at a level above the government decreed price.  No wonder “There is a huge gas shortage across South Africa,” to quote Business Live.  This market failure has been caused by the government, and the government is preventing free and peaceful people to pay a market related price to acquire gas.  What’s worse, the government will through the threat of violence and use of force, exacerbate the gas shortage.

Some have argued that the supply shortages are a result of gas refinery shutdowns, but this is just wrong.  When you have refinery shutdowns and supply falls, the price will naturally rise to match supply to demand, a market process that is obviously being hampered at the moment.  A refinery doesn’t need to lead to country-wide shortages, it only means you will pay more for the same amount of gas; when the price rises enough, consumption will decline to balance the market.

Perhaps the single most important function of free market prices is to ration supply, to allocate supply to those demanders most able and willing to acquire it.  In SA, the price isn’t allowed to rise, which is why we are presently having market failure.

The solution to this is to free the LPG gas market, and get government’s dead and market-failure-causing hands out of the economy.

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