Monday, May 16, 2005

On gasoline and blackmail

We were out this morning trying to get some errands run and ended up passing around 16 gasoline stations. Of those 16 only 3 had gas that could be used in later model cars. And the price for it was 3.20 hryvnas for 95 octane which had a price cap last week of 2.99. These three stations all had lines of cars.

And we just heard that Lukoil will only give out 10 liters of gas at their stations. In the same report, Tymoshenko also announced that a refinery will be built in Odessa that is supposed decrease the dependence on Russian supplies. It will take a year and a half to finish. That should help me fill up my car by Christmas, 2006.

Any guesses on who will own that refinery? I don’t know for sure but with all that has been going on, I would bet it will be government owned.

Tymoshneko said that the gasoline situation is a result of Russian blackmail. This will get tedious if every time something happens the Russians get the blame. But it is hard to see any Russian hand in it or any other hand but the invisible one that works in the market. The problem is that prices were capped by government fiat. And when prices are capped, it is not difficult to see the result: Companies will sell their product elsewhere to markets where the price is not capped.

This is more apace with the other comments coming from the Prime Minister. The problem with the rise in beef prices is the middleman price gouging. Sounds a bit retrograde to me. The only persons who had any legitimacy in the bad/good ole’ days—which are they?--were the ones who put their labor into it and the ones who consumed it. Anyone else was an enemy of the state. But middlemen have their function too. They get the products to market, something that ought to be considered a real benefit in a country with a population as widely dispersed as the Ukraine has. (Bread, for instance, is not available in the villages in the quantity and quality it is available in the Ukraine. No middlemen.)

The Prime Minister said it is blackmail by the Russian oil companies. The problem with that assessment is that blackmail is at the base of capitalism. If you do not meet the price, you will not get the product. The reason why it is considered legitimate is that the market is free and the consumer is able to go to other producers and sellers. The argument is that with that freedom comes competition and that competition ends up in lower prices and better quality. What actually happens is more complex but these are the justifications for it. And it seems to work fairly well doing what it does.

The problem is that some in the administration are either trying to solidify their base by a populist appeal or some are working on their own account with this populist appeal. The problem is that your populist appeal is undermined when you have voters waiting in line to fill up their cars at higher prices, especially after you have announced that you have brought the price down, that is, have it under control. I guess that is why the Russians must be blamed.

And it may work. But foreign investors see it for what it is and will not be happy. They—whoever they are-- might end up with a larger majority in Parliament but find foreign investment drying up all around them. That will affect growth. The populace might be consoled with politicians saying they have brought them justice for what happened to them in the past. But being able to eat and to provide for a family in the present is a kind of justice too. That is something they would be foolish to ignore.


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