INSIGHTS: THE INVISIBLE HAND, NOT WASHINGTON, IS EASING SUPPLY CHAIN CRISIS
GUEST COLUMNIST: Sean Higgins, Research Fellow, Competitive Enterprise Institute. Permission to reprint.
The supply chain crisis is showing signs of receding. This is happening not because of any action by the White House or Congress. The market itself is correcting the problem. There’s still a long way to go to for the crisis to recede entirely. To help it along, the best thing Washington can do is to get out of the way and let the invisible hand of the market continue its work.
The backlog of ships anchored offshore and waiting to unload their cargos at the Ports of Los Angeles and Long Beach has dropped to 71, down from a height of 86. The cost to ship a container across the Pacific had its biggest decline in two years in mid-November, though it is still about three times what it cost a year ago. Retailers like Target are reporting being fully stocked up for the holidays.
Partly this is a consequence of the COVID-19 outbreak receding. The pandemic was the spark that caused the crisis, creating health and safety concerns that slowed operations at the ports and created backlogs that sent shocks all down the rest of the supply chain.
Another major factor is that people throughout the supply chain began reacting to the signals the market was sending. Employers utilized a tried and true method for dealing with situations when the current demand for goods can’t be met: hire more people to deliver those goods. The Labor Department reported this month that the transportation and warehousing sector added 54,000 jobs in October. Overall, that sector now employs 149,000 more people than it did in February 2020, when the pandemic first forced the economy into lockdown.
Major retailers like Walmart, Target, Costco and Home Depot were already highly skilled at logistics. They put that knowledge to use by chartering their own ships to bring supplies from overseas. Unlike the massive freighters stuck off the shore of southern California, the retailers chose smaller vessels that could be routed to similarly smaller, less-congested ports.
Retailers have also found alternate suppliers and products and opened new warehouses to build up larger inventories. Meanwhile, the ports have begun moving to 24/7 operations, which they weren’t doing previously, albeit slowly and fitfully.
What hasn’t helped the situation much is the White House or Congress. President Biden made a show of saying in October that he was directing the ports to open 24/7. What he didn’t say that no rule or regulation had prevented the ports from operating around the clock previously. The issue was that the West Coast ports’ contracts with the International Longshore and Warehouse Union (ILWU) had made 24/7 operations prohibitively expensive. Nor had the White House gotten the union to make any apparent concessions. Biden was just taking credit for the ports’ decision to accept the costs. Even then, the move has not been easy.
Not only that, but the ILWU has rejected the port’s latest contract offer, creating the specter of new disruptions when the contract runs out next year. It’s probable that the union is just using the current crisis to play hardball in its negotiations, but it’s still an embarrassment for the White House, which had claimed it had brokered a deal after “weeks of negotiation” with major union and retailers and freight movers to ensure 24/7 operations from now on. The union, instead of feeling pressure due to its role in the creating the supply chain crisis and making concessions to help alleviate it, appears emboldened.
The White House and Congress have also dedicated $17 billion of the Infrastructure Investment and Jobs Act, signed into law earlier this month, to improve port operations. As is typical in Washington, the money likely won’t be dispensed until after the worst of the crisis has passed.
Capitol Hill would have been better off remembering one of Ronald Reagan’s favorite sayings, “Don’t just do something! Stand there!”
ON THE ECONOMY: MARY LONG
John Dunham, Managing Partner, John Dunham & Associates
Mary Long is a hypocrite. She does all the things that she tells us not to do. Selling filth from a corner shop, and knitting patterns to the high street queue. She paints roses, even makes them smell good, and then she draws ti##ies on the karzy wall. She drowns kittens just to get a thrill and writes sermons in the Sunday chronicle. How did you loose your virginity Mary Long? When will you loose your stupidity Mary Long? So begins the song Mary Long, written in 1972 by Richard Blackmore, Ian Gillan, Roger Glover, Jon Lord and Ian Anderson Paice, and released on Deep Purple’s 1973 album Who Do We Think We Are.
The song is about two self-styled moral crusaders Mary Whitehouse and Lord Longford. Yes this is the same Whitehouse that Roger Waters sings about in Pigs (Three Different Ones). Whitehouse, appointed herself as the guardian of Britain’s moral standards, and led the ‘Clean Up TV’ campaign, railing against (mostly comedians) Dave Allen and Benny Hill, and just about everything else that made people laugh.
The Long part of the title referred to former Labor minister and Knight of the Garter Lord Longford. Francis Aungier Pakenham, 7th Earl of Longford, was a British politician and social reformer and advocate of penal reform. Lord Longford unsuccessfully campaigned for the release of Myra Hindley, who was convicted of kidnapping, sexually assaulting, and murdering as many as five little girls in what became known as The Moors Murders.
Gillan was particularly upset by self-styled moral crusaders like Whitehouse and Longford, and their very waggy-waggy finger attitudes, and fused these two together in his lyrics to represent the hypocrisy that he saw at the time.
Hypocrisy seems to be the word of the day in late 2021 as well. Just last week, the Secretary of Energy, Jennifer Granholm, a career politician with absolutely no experience in the energy field, was unable to answer a reporter’s question about the use of petroleum in the United States, all while pontificating that the release of less than 3-days-worth of supply from the Strategic Petroleum Reserve, would help to reduce gas prices. This move, as with most of the energy related decisions by the current Administration are more of a stage show than an actual policy. Since taking office the Biden Administration has:
- Stopped all oil and gas leasing on federal lands (including Indian lands);
- Killed the Keystone XL pipeline, which was to bring oil from Canada and the Bakken fields in North Dakota and Montana to refineries;
- Moved to enact rules on methane capture that the Environmental Protection Agency had found to have a net cost on the economy;
- Nominated a Treasury Department official who claimed that she wanted to see petroleum companies go bankrupt;
- Moved to overturn rules on oil and natural gas development related to the Sage Grouse rules that state and federal officials had hashed out with both industry and environmentalists that would have allowed for both development and habitat to exist in harmony;
- Moved to enact rules banning so-called fracking which is a technology that has been in use since Roman times.
All of this, of course has had a predictable effect. It has led to an increase in energy costs, which according to the Bureau of Labor Statistics, are up by 39 percent since President Biden took office. The Administration has suggested that the reasons behind these stark regulations on the domestic petroleum industry are related to so-called climate change; however, as is the case with most hypocrites, the Administration has also:
- Supported removing sanctions on the Nord Stream 2 pipeline, helping to promote oil and natural gas development in Russia;
- Begged OPEC to increase oil production;
- Signed on to a climate change deal that even environmentalists said was little more than a PR stunt;
- Released 3-days-worth of oil from the Strategic Petroleum Reserve in another PR stunt; and
- Eliminated any gasoline tax hikes from the much-touted Infrastructure Bill.
The one thing that the Administration has done is to get Gretta Thunberg and the petroleum industry to agree that its policies are lousy.
Of course, policy making is an ugly process and there is give and take in everything. It is rare to see a consistent policy coming out of Washington on just about any issue; however, the blatant hypocrisy surrounding the Administrations Push-Me-Pull-You policies related to energy have had a real cost, and not just in terms of inflation. The real costs are to the industry as a whole.
Prior to the government-imposed shutdowns surrounding COVID-19, there were nearly 800 oil and natural gas drilling rigs in operation in the United States (according to Baker Hughes). Today, there are under 570. This is despite the highest oil prices in 8 years and the highest natural gas prices in a decade. It is also a period of very dovish monetary policy, meaning that oil and natural gas drillers should have easy access to capital. But they don’t.
Even before the pandemic, much of the US drilling industry had been frozen out of capital markets because their profits were falling. Without capital to invest, drillers moved their focus to completing existing wells. As regulations have boosted the cost of drilling and completing plays, companies have focused more on increased dividends and share buybacks since prices still cannot generate enough return to compensate for the increased risk. This is why US production of oil is down by 18 percent since the end of 2019.
Markets work, so eventually higher prices will lead to increased production; however, higher prices due to regulations will keep prices above equilibrium levels, suggesting that $80 per barrel is still not a market clearing point. This means that prices will continue to climb no matter how much President Biden begs the Russians to produce, or releases oil from the SPR, or blames oil companies for inflation.
Until energy policies shift back to promoting America’s abundant, low-cost domestic energy resources and the jobs they provide, and stop selling filth from a corner shop, and knitting patterns to the high street queue, high prices will be here to stay.