May 13, 2006

It Is Always Something

Tightening supplies, rising prices and shortages loom. Blame is placed upon environmentalist, on government regulation, on corporate greed. Retailers deal with angry customers, consumers wonder how they will cope, unease infects the land, it is a crisis in the making. At home, environmentalists cheer the rise in price, in the hope that it will push down demand. Angry citizens demand to know why the government allowed the country to become so dependent upon imported supplies. There is a widespread belief in a conspiracy among the distributors. Who is getting rich and who is getting screwed? Sound familiar? This describes the current gasoline situation in this country nicely but I am not thinking of gas, I am referring to the Japanese wooden chopstick crisis. It seems that China has Japan over the barrel when it comes to the matter of wooden chopsticks. The Japanese have a big demand for chopsticks and the Chinese have long produced cheap chopsticks and plenty of them. Over time the Japanese have stopped producing wooden chopsticks, choosing to import the Chinese ones. Everyone has been happy with this arrangement for years, until now. It turns out that wooden chopsticks are made by first cutting down trees and it seems that cutting down all the trees has dire environmental consequences. So prices for the raw materials are being increased, government levies are being added and it rolls down hill until it hits the consumer in the pocketbook. This is how markets work. Whether it is gasoline or wooden chopsticks. In the short term consumers will pay higher prices, some will find suitable substitutes. Over time production will shift to lower cost areas and innovation and market and societal expectations will redefine demand. There was a time when no sensible American would consider pumping his own gas. Now we don’t think anything of it. In 1960 the average car got 14.3 mpg but by 1997 it had increased to 21.3 mpg. Most 1960 drivers didn’t see a problem. Increased demand, tightening supplies and environmental concerns forced the mileage up. This is how it works. Demand exceeds supply, so prices rise. Prices rise, so suppliers increase production or bring suitable alternatives to market. Consumers buy less or find substitutes and prices fall as demand shifts. Does this happen overnight? No, it happens over time. Right now demand is outstripping the supply, so changes are coming, whether you are concerned about wooden chopsticks or a gallon of unleaded. The market will eventually correct itself. Tag:

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