Thursday, June 26, 2008
Mantua On Subsidies
I say it again, Mantua, you should be blogging, you'd be a hit. You certainly write better than me, and not as antsy or sarcastic as me as well. Here's what Mantua wrote on subsidies:
You are right. Price subsidies are found all over the world. They all result in distortions to the smooth operation of the world's free markets but ultimately they all fail.
For many years, US & European farmers received heavy subsidies to keep them afloat. These subsidies allowed them to dump surplus output of cereals, cotton, sugar, etc onto consumer markets worldwide. The resultant low prices resulted in:
1) many farmers in the 3rd world abandoning their farms;
2) mass migration to already overcrowded cities;
3)endless supply of cheap labour to burgeoning new factories;
4) rise of the middle class in newly developed countries
5) increase in demand for food & fuel at just the time when supply has reached its peak.
Same thing with oil. The industrialised West was built on the back of cheap oil supplies from Middle Eastern states or nations whose rulers were encouraged to spend their oil incomes wastefully, making them ever more dependent on further exports to the west.
In spite of their continuous preaching for democracy worldwide, the western powers propped up many non-democratic regimes, notably in Saudi Arabia, Kuwait & Iran (pre-Shah).
The resultant indecently low oil prices led to unsustainably wasteful lifestyles in the west (especially the US) which were mimicked by nations worldwide.
In a sense, we could argue that ALL oil importing nations have been subsidised for many years by cheap oil from the Middle East. Like all forms of subsidies, this situation could not last forever beause:
1) the supply of cheap oil is finite - all the big oilfields have been discovered;
2) the low oil prices discouraged efforts to look for oil elsewhere;
3) sharply rising fuel demand from newly developing countries;
4) increasing democratisation & radicalisation of the Middle Easter & other OPEC nations, who are finally realising they should manage their god-given natural resources less wastefully.
In conclusion, the recent sharp rises in energy & other commodity prices is the natural outcome of decades of wasteful consumption & chronic under-investment in new supply sources.
While speculators have no doubt exacerbated the recent oil price rises, we tend to ignore the underlying cause which is the supply/demand balance.
Although there is sufficient supply today (as argued by OPEC members in their rejection of demands by oil importing nations for increased oil production), the market realises that new & more costly oil supplies take time to come to market & may not satisfy current demand trends.
This trend will keep on rising unless consumers worldwide change their lifestyles drastically or else have it forced on them through severe economic recessions. Especially in the most wasteful (& blinkered) nation of all, the US.
Curb the speculators if you must, but we must all reassess our own lifestyles & assist in curtailing the spread of consumerism worldwide, at least in its current form.
p/s photo: Bai Xin Hui