Will Export Restrictions on Energy Echo Those on Food?

Posted by Jeff Rubin on May 18th, 2011 under SmallerWorldTags: , ,  • 12 Comments

Will Export Restrictions on Energy Echo Those on Food?

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. n 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 responding 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% 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?

  • Kevin Cobley

    It’s a typical human reaction! In the US during the original oil embargo individuals in their cars maximized their efforts in filling their cars to the brim on a daily basis, they were scared that their next fill would be the last, similarly the same thing happened recently during the short lived food crisis. It will again occur when the US farm production falls away this year due to bad weather.
    People as individuals always try to hoard when they fear failing supplies and the individuals exert political pressure for their governments to do the same and they do or they are out.
    When it’s clear oil is in short supply for what ever minor interruption that may occur in an overstreached supply system in the next year or two, consumers worldwide will be lining at gas stations in days and stockpiles will quickly be emptied. People in some producer countries with some exports will then insist their government cease exports (also politicians seeing the consequences of shortages on governments will also seek to protect their positions by lowering or ending exports). Countries affected in this manner Mexico, Canada, Norway, Venezuela, Iran and other nations with larger reserves like Russia may seek to sell at very high prices.
    It’s easily some see that some small distributional shock could lead to massive shortages and catastrophic high prices in just a few months and this could occur quite suddenly.

  • Anonymous

    Oil is crawling up again but still on a 3 month-low. The eventual “domestic hoarding” scenario depends on a summer rebound into upwards of 125$/barrel on Brent, which may seem farther away than ever, with the (pointless) delaying of an imminent Greek reestructuring in July/August that will make the Lehman flop seem tiny (especially if it’s just the first domino in a series).
    Add this to weak prospects coming from Japan and USA and we got a tight rope walk waiting for the right catalist for another September-2008 price fall.
    Hope most people in charge won’t get fooled a third time, if it ever comes to that.

  • Steve

    How the economy of this rolls out isn’t really the main point, but rather a rusult, of what’s really at hand globally.  Read this article, which sums up things quite well, and it continues to play out further into 2011.  It’s four pages:


    As an example, most North American farmers aren’t going to get their corn planted on time to meet world demand, due to weather.  And many wheat fields are also too wet.  Global dependencies like these make things so vulnerable and fragile.

    …Yup, our world is about to get a whole lot smaller, and it has already begun.

  • Unc

    Jeff,as usual,you always bring up good topics for discussion, However according to the doom and gloomers,tomorow we are all toast and it is the end of the world,tomorow will pass and the energy situation will remain and the markets will adjust to demands for commodities accordingly.Will there be countries covering their butts,you bet and that will instill inovation and self sufficiency in key areas of commodities, where the market prices in the past made those kind of progressions  unessisary.The markets will move the change and countries will do what they have to do to move forward.The world is indeed getting smaller.Unc.fsj

  • Anonymous

    I enjoy the “doomer/gloomer” statements made by so many.  It tells me a lot about their income/standard of living hence their concept of reality.  For hundreds of millions, the doomer/gloomer scenario has arrived and for many some time ago.  These folks are already starving, going without life’s necessities, etc.

    Some years ago, I had a conversation with a Canadian at a rest stop in British Columbia.  He and I agreed on the concept that millions were already experiencing severe impact and that the impact line would move higher as time went on.  We agreed, at some point, it will reach us.  At that point, it isn’t an academic discussion any longer. 

    As I watch the US sacrifice of millions of unemployed to the trash heaps of our society, I think of our discussion.  These millions are ”collateral damage” as Cheney used to say.  I watch the proposals to, in essence, destroy the meager social support system of the US.  It’s called sacrifice the weak, elderly, unemployed, disabled, etc so the rest of us can live comfortably.   Any guilt we might feel will be rationalized away with stereotypes of lazy, good for nothings and other negative statements. 

    Climate change and energy shortages are already at work and, for those that look, have been for some time.  They will bring the ”collateral damage” line ever closer to all but the very wealthy.  The “collateral damage” line passed me a couple of years ago.   

  • Rojelio

    To what extent can OPEC countries withhold oil exports? Don’t most of them need this income to prevent social unrest and to buy food?

  • Rojelio

    To what extent can OPEC countries withhold oil exports? Don’t most of them need this income to prevent social unrest and to buy food?

  • Rojelio

    If you think we have a “meager social support system” right now (I don’t disagree with you necessarily), just wait til next year or so when we’ll have to cut billions for SS, medicare, medicaid, SSI, unemployment checks and maybe even whack some of the 44,000,000 people on food stamps so that we can embark on another round of bailouts for our financial geniuses.

    A study of an empire at its end reveals that the leaders embrace military expansion in distant regions as a higher priority than the deterioration of social structure at home. They also furiously run the printing press to pay off escalating debt as part of the endgame and this action NEVER leads back to prosperity. I don’t know why it always has to end in tragedy like this but it’s a well-traveled road.

  • Nicola_lavoie

    Je ne veux pas commenter son blog mais, dans une entrevue Jeff Rubins, a comme opinion que ces juste d’augmenter la tarification HQ au Québec; comment peut-il affirmer ce commentaires alors que nous couts de production sont bas et que la tarification actuelle dépasse celle du Maqnitoba, Colombie-Britannique et de l’état de washington, qui eux possèdent des barrages comme moyens de productions primaires ??

  • Beamer

     I’m typically hoarding incandescent lightbulbs and speculating they will have a much higher value when banned. Falling supplies is an artificial situation in this case.

  • http://twitter.com/GeoEng51 John Sobkowicz

    Hmm…an interesting but scary article.  Suggests we’ve finally reached the “innovation gap” that Thomas Homer-Dixon talked about.  I can’t vouch for all the claims in the article, but the outlook looks grim.  What is even more grim are the responses to the article by various people.

    …This is not a “generation gap” issue (as my generation claimed in the early 1970′s).  Its a case of trans-generational, human ignorance and arrogance, combined.  Are we doomed to an inevitable future, as some contend (the “Four Horsemen” of Death, War, Famine and Plague), or do we still have the will power, the resources, and the intellectual ability to respond to rising demands for energy and food?  I worry about the first two, particularly given the economic state of the western nations.

  • Ernie

    Jeff, We still want you at UP (www.theUPexperience.com).  I have a fishing trip that I want to discuss with you (in the Bahamas).  Contact me at ernie@theuperience.com and we can explore something you will not want to pass up.  5 minutes of your time please.  Thanks, Ernie