Fungible Commodities

 

There's this delusion making the rounds that buying Venezuelan oil is better than buying Russian oil.  The only people holding this delusion are those who fundamentally misunderstand economics.  In America, alas, that's 'nearly everybody'.

The notion of a 'fungible commodity' is that product from location A is largely replaceable by similar product from location B.  Let's use 'oil' as the base product for the sake of discussion — although the identical analysis is applicable to almost everything that fits within the ambit of 'commodity': diamonds, wheat, beef, silver, lumber, helium...

If we decide that we don't want to buy oil from place A, what happens?  We have created a local reduction in demand for A-oil.  This will cause the price to drop momentarily and other oil buyers will be drawn to it.  If those other oil buyers move away from B-oil and replace it with the now cheaper A-oil, this will cause the price of A-oil to rise as the price of B-oil drops.  We then swoop in to buy the now-available B-oil, driving its price back to equilibrium.  Everything is the same because the supply of oil (whether A- or B-) is the same, and the demand is the same.  Executing a preference for a fungible commodity from one place causes an automatic rebalancing of other people's preferences for a different place.

What causes the price of a commodity to change is imbalance in supply and demand.  If location A curtails the supply of oil but demand stays constant, the equilibrium price will rise.  If you're wondering why gasoline is suddenly getting more expensive, it's because supply has been reduced but demand has not.  The reduction in supply began when the U.S. government began making it harder for American refiners to obtain oil — by closing pipelines, by restricting certain production methods (e.g.: fracking), and other supply-chain-related causes.  President Biden has asked Saudi Arabia to pump more oil to backfill for the oil that U.S.-based pumps are no longer producing, and SA has declined because high prices are, to them, a good thing.  Now, Biden is trying to make a deal with Venezuela to buy their oil, but this, even if successful, won't change the equilibrium point.  Other oil buyers will simply get theirs from Russia.  The supply will still be low (and the price high) because we're no longer pumping.

There is a second cause for the high price of oil — the higher price for everything, actually — and that's 'inflation'.  We're seeing the same syndrome with inflation that we're seeing with oil: we're printing dollars that aren't backed by anything.  In effect, the supply of dollars is going up but the wealth that dollars putatively represent isn't rising at the same rate.  The value of each new dollar is zero, but paper money is a fungible commodity: you can't tell one dollar from another, so the average value of any given dollar is reduced until the total of all the dollars in circulation balances with the available product that they can be used to purchase.

This is what happens when you let people run your economy who don't actually know how to run an economy.

And here's the really bad news: nobody knows how to run an economy.  Only the economy can run the economy.