Dear Editor,

I write in response to a column authored by Oneil Madden, published in the Jamaica Observer on August 18, 2022, entitled ‘Solutions to high gas prices’.

As someone who is almost a holder of a doctoral degree it gives me cause for great concern that the writer, Madden, does not seem to be able to differentiate between alternatives and solutions for a problem. He may not be an economics major but clearly he should’ve been able to follow the sensible logic of what contributes to high prices for any commodity. Supply and demand dynamics are fundamental to pricing levels. Speculation in related financial derivatives and costs of discovery, mining, research, production, and marketing complete the list of factors which drive commodity prices.

Therefore, if you are going to solve a problem, the relevant factors which contribute to said problem should be the starting point. But what Madden did was to jump, clumsily, to alternatives and a fallacious, discarded economic theory of price controls.

Price caps are the same thing as price controls. Barbados Prime Minister Mia Motley should have known better. But Madden should have researched the topic and asked an economist for clarification.

Price controls distort price signals, which are core to markets functioning effectively and, not unrelatedly, economic growth. Prices balance supply and demand, coordinating production and consumption. They are signals, full stop. On the demand side, when they are high and rising, they encourage more people to cut back, substitute, and economise. At the same time, high and rising prices imply greater potential profit, signalling producers to boost supply, which eventually helps to keep prices in check.

But, if prices can’t fluctuate freely, they don’t tell producers when they need to crank up output, and they do not incentivise people to adjust consumption in order to help limited supply stretch further in the short term. As a result, you don’t get the changes in behaviour that help to stabilise prices. Heck, price controls can even cause severe shortages if prices are set near or below producers’ costs, which discourages production by destroying the profit motive — ultimately driving prices far higher still.

Price controls aren’t hard, permanent ceilings. Sometimes the caps reset periodically, causing prices to jump in blocky stairsteps, much as the UK is enduring with household energy prices under its retail price cap right now. Or they lift and shortages quickly drive prices much higher — potentially higher than they would otherwise have been. This happens regularly in emerging markets nations that have historically been frequent users of fuel price caps. Even if a cap is set above current market prices they can quickly shift from ceiling to target as producers worry they won’t be able to raise prices later, if need be.

The reality of life is that it is not fair. Resources are not distributed fairly and so some countries have massive natural resources and some severe deficits. Those are the facts of life many Jamaicans just do not want to accept. Jamaica has a competitive disadvantage in petroleum fuels and so we will always have a challenge with meeting the world prices of them.

The only real partial solution to offsetting high gas prices is presented via the derivative markets and business choices.

The economic theory which I personally coined years ago applies here. You won’t find it in any economics textbook. When there is a product or service that is essential and vital to the operations of a business or country and there is a shortage of natural deposits or resources, the obvious choice is to either invest directly in it or use the derivatives market to hedge against high prices. So, practically, Jamaica should have invested directly in the petroleum markets or use the related derivative instruments to hedge against higher prices. Mexico has a fantastic track record of hedging in these markets, so it can be done.

Paul McFarlane

plantsbypaul@gmail.com