{"text":[[{"start":5.15,"text":"It may seem strange to celebrate, but let’s hear it for oil-price shocks. Admittedly, there is little reason to rejoice in a disruption to the world’s energy system. The price of oil is linked to the price of all sorts of essentials, including food, so this crisis will be painful for billions of people. But the high price is the consequence of the energy shock, not the cause, and it is a healthy consequence too. Sharp price increases are like painful nerve impulses: we might wish them away, but they send an essential signal to remove ourselves from harm."}],[{"start":41.75,"text":"What sort of signal? First, and most obvious, the signal to consumers to cut back. Anything with oil in the supply chain — from petrol to plastic to fertilised crops to package holidays — will become more expensive. The signal is to reduce when you can, because carrying on as usual will cost money. Maybe holiday nearer home this year; maybe find someone to share car journeys with. Maybe pull on a cardigan and turn down the central heating."}],[{"start":71.84,"text":"Or maybe none of these things. Unlike ration books or speeches by Jimmy Carter, price signals don’t tell anyone what to do; they change the incentives and we are all free to act, or not, depending on our own circumstances and preferences."}],[{"start":88.98,"text":"A second signal is to producers to look for ways to save energy in their production process. The low-hanging fruit will probably have been plucked already, but higher oil prices shift the calculus. Energy-saving measures that once seemed too difficult may now make sense. These measures are often simple reflections of the trade-off involved in using expensive energy, such as bundling deliveries together to save fuel, or switching off the patio heaters in the pub garden."}],[{"start":120.88,"text":"The third signal is to substitute away from oil and towards other energy sources. Disruption to the flow of oil through the Strait of Hormuz is good news for the makers of batteries and solar panels . . . and coal miners. If it lasts, or recurs, it may even be good news for the builders of nuclear power stations."}],[{"start":141.62,"text":"These energy-saving and oil-saving substitutions will, in the short-run, simply involve picking existing technologies and techniques off the shelf. But the same signal will also reach the world of science and technology. In 2002, the economist David Popp published a study of “induced innovation”, tracking the response by inventors to the oil shocks of the 1970s."}],[{"start":166.62,"text":"The oil price leapt in 1973 and surged further in 1979, before sliding lower throughout the early 1980s. Popp found that patent activity tracked the oil price — for example, there were 10 successful patent applications in the field of solar energy in 1972, but more than 100 in 1974 and about 300 a year in the late 1970s. As the oil price fell back, so did patent activity, with fewer than 50 successful solar patents a year from the mid-1980s onward."}],[{"start":205.05,"text":"Popp found that a similar story could be told for batteries (a natural complement to solar energy), and patent applications for deriving liquid and gaseous fuels from coal. In each case, the few years of high oil prices led to a few years in which oil-saving patent activity was also high."}],[{"start":226,"text":"Today’s high oil price sends more signals: to find oilfields outside the Gulf region; to build new pipelines and tanker ports that are further from harm; to find ways to defend vulnerable shipping. In fact, there are far too many to list, and that is the point: a price signal — which, of course, is also a monetary incentive — is an invitation to everyone, everywhere, to do things a little differently."}],[{"start":252.54,"text":"One result of all these signals twitching across the nervous system of the global economy is that catastrophic shocks are often less catastrophic than they first seem. We can adapt quickly when we have to. The 2008 banking crisis is a salutary counter-example, but we have seen many examples of apparently grievous economic harm — from earthquakes to typhoons to regional wars to Covid-19 — in which the damage was cushioned by smart operators swiftly finding profitable workarounds and alternatives."}],[{"start":289.69,"text":"Please indulge me in delivering this extended public service announcement, because while it will not surprise many readers of the FT, it may be news to the next person you talk to. Certainly, if governments around the world are any guide, the lesson that prices are signals to watch rather than evils to suppress has not been repeated quite often enough. All too frequently, the governmental instinct when voters are leaning on a hot stove is to inject a dose of anaesthetic rather than help them leap to safety."}],[{"start":null,"text":"
"}],[{"start":322.32,"text":"The most infamous example is President Richard Nixon’s decision to freeze wages and prices in the US in the summer of 1971. Although many prices were liberalised again after 90 days, some were not — and the price of gasoline remained under government control for years. Some of the consequences were obvious: artificially cheap fuel meant long lines at the pump, and people wasted fuel as they drove around looking for more fuel."}],[{"start":351.05,"text":"Other consequences of price caps were obvious only in hindsight. Chicken farmers faced a price cap on the chickens they sold, but the price of chicken feed was anything but. This turned every chick into a lossmaking asset. Farmers smothered newly hatched chicks by packing them into airtight barrels, telling journalists that “the more we produce, the more we lose”. Did the price of chicken burgers fall as a result of this grim waste? Of course not."}],[{"start":379.39,"text":"Another unexpected problem, highlighted in a new working paper from economists Brian Albrecht, Alex Tabarrok and Mark Whitmeyer, is that in 1974 gasoline was in short supply in the big cities but “more than abundant” in rural areas. As Albrecht and colleagues point out, this is a natural consequence of constraining the price system. Since fuel sells at the price cap everywhere, why bother to pay the additional cost of delivering it to an urban area? Only when the gas stations near oil refineries are drowning in more petrol than they can sell will the tankers head to more distant markets."}],[{"start":418.94,"text":"Closer to home is the vast sum Liz Truss pledged to prevent energy bills from rising in late 2022, estimated at the time to be nearly the annual budget of the NHS. Households were encouraged to burn scarce gas, and the UK lives with the fiscal consequences."}],[{"start":439.92,"text":"Prices are the nervous system of the global economy. That sharp pain we are all feeling is the response to a series of injuries that few of us cared to risk, but which were inflicted on us anyway. That’s annoying — and for some, more than merely annoying. But now we need to clean the wounds and stop the bleeding, not beg for enough fentanyl to end the pain."}],[{"start":464.11,"text":"Find out about our latest stories first — follow FT Weekend Magazine on X and FT Weekend on Instagram"}],[{"start":479.19,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1775702314_2016.mp3"}