Consumers need to supplant supplier led demand with consumer led demand, which is as it should be.
We live in a complex monetary world and most of us are so affected by life’s weapons of mass distraction that we are inclined to accept rather than question why oil prices are tracking up so much. We just deal with the situation as passive observers, moan a bit and get on with life. This so human fait accompli response has consequences and these we experience, in this case to our detriment, in higher living costs and falling living standards.
In a simpler, yet to be realised world economy, supply was driven by demand or otherwise put, you can’t sell what no one wants to buy. As consumer demand increased then the entrepreneurial spirit would mobilise its foot soldiers to supply that demand. A very simple idealised balance was cut between I want + I have = here it is, at a price that is set by the basic principles of free market economics. Consumers were the puppeteer and suppliers were the puppets. As scarcity changed then prices varied, up or down, for a given demand profile. We could characterise this as actual demand by being consumer led, as there are no outside forces acting to affect that basic of all definitions of demands. What we see at present though is forced demand that is geo-political / supplier led demand not consumer stimulated.
So, how does business strut its cause? Well for one it creates demand and as the adage suggests envy is good for trade, so create envy through focused marketing and there’s the potential to impact demand. This is a fundamental way of stimulating demand which in turn correspondingly increases supply. Oh for a simple world… But market life is not simple and demand is contorted by many different actors with conflicting agendas.
In more recent times however supply and demand has been led by conditions other than those within consumers control.
- The 2008 economic crash was created by market structural problems (or to finesse this more, a lack of business ethical oversight and attendant regulation) in the guise of sub-prime mortgage products that were ultimately customer defaulted which led to banking losses. The immediate effect was a drop in consumer demand caused by a purchasing power slump created by business lending restrictions. This was not consumer demand led but rather largely due to money market systemic casino banking which we are now assured will never happen again. For consumers this was the product of someone else’s nefarious acts and consequently largely out of our collective control. Hopefully, we’ve learnt from our lack of market control and there are regulations and financial market controls now in place. At a stretch and with a degree of magnanimity we can view this episode as an aberration never to be repeated. Consumers gave up demand control, we learned, made reasoned financial market adjustments and made the system better.
- We then had COVID-19 which has a demand impact well illustrated in terms of oil production with the following annualised demand / supply profile (bpd = million barrels of oil per day): 2019 = 99.7 bpd, 2020 = 91 bpd, recovery 2023 = 101.2 bpd increasing 2026 = 104.1 bpd. Given the dip in demand from 2020 we can see this as a consumer led demand economic anomaly gestated under the generally accepted duress of the pandemic restrictions. This wasn’t however consumers positively exercising their collective and not unsubstantial power but was driven more broadly by human existential factors. This one was down to consumers baser instinct for corporeal survival. In this case consumers were buffeted by events out of their direct control. We survived at the cost of giving up control of consumer demand, for a while.
- More recently consumers have had to, and still are enduring, the debilitating affects of the economic attritions resulting from unfolding geo-political events in Ukraine. This one unlike the other two examples is all of our own doing as a species given this time we are not learning on the economic job or reacting to events largely out of our control.
In this case the producers of oil as represented by OPEC (and its partners such as Russia who incidentally have of late enjoy up to 65% of its fiscal revenue from oil and gas) are setting the price. Demand which for oil is, as previously discussed, a consistent quantity per year and as a supplier OPEC are setting an ever increasing oil price. Again this is not consumer led but rather the act of an energy cartel holding the world to ransom by restricting access to a commodity that we have all come to rely on. This is producer led inflation. Given inflation here in the UK is heading for 10% if the Bank of England do again raise the interest rate to 1.25% next week it will hit those who have little, or any, economic control. As such using fiscal devices to control demand is like blaming the victim for the transgressions of the criminal.
We can appreciated that there are supply chain bottlenecks but Saudi Arabia & UAE have spare capacity to turn on the taps more which will rebalance supply. Given this opportunity, supplier led price rises are not actually justified and OPEC are creating scarcity which is known to impact the oil price in their favour. This lack of consumer control requires a response and consumers shouldn’t just roll over and let consortia in the oil producing nations profit at the expense of societal wellbeing.
It’s time for consumers to take control and Italy’s prime minister, Mario Draghi, has suggested a more social capitalism plan to manage the recent oil price hike. The former European Central Bank president has floated the notion of creating a cartel of oil consumers to increase our collective bargaining power. Consumers would effectively agree on what they are willing to pay and this would be a counterbalance to OPEC as the supplier who set annual oil production quotas.
It’s time for consumers to take control over reducing energy poverty by taking organised action. The plan floated by Mario Draghi seems eminently logical / sound as an initialising consumer control primming activity.