EDITORIAL Physical shortage in Bulgaria

A central tenet of fundamentalist petroleum economics is that physical shortage never occurs where markets work freely.

Disciples of this holy orthodoxy can be hard to find. Even more so are disciples willing to confess publicly to the belief. Something about economics makes people squirm over words such as "never."

It's a pity. Nothing clarifies analysis quite like brassy assertion.

This view suffers nothing from the physical shortages that do occur from time to time. "Physical shortage" here means failure of oil to materialize where someone wants it and is willing to pay the going price. Mechanical disruptions don't count and, in any event, seldom have lasting effect. Physical shortages happen only where markets don't work; working markets won't tolerate them. And a market not working usually means a government working too much where it should not.

Sad example

A sad but classic example has developed in formerly communist Bulgaria. Gasoline stations have run out of product, even though there's oil at storage centers.

The culprit is a combination of price controls and collapsing currency. For a while, product values didn't justify the costs of moving product from wholesale inventories to retail outlets.

In welcome recognition of the dilemma, the interim government in Sofia last week hiked gasoline prices. While the move should coax at least some oil out of storage, Bulgaria's state-owned refineries will have trouble replacing withdrawn volumes. They have such severe credit problems that crude suppliers have cut deliveries.

The economic principle illustrated by the refiners' credit jeopardy is simple enough: When an enterprise buys raw material at world prices to manufacture products that must be sold domestically well below world levels, it eventually goes broke. For some reason, governments have trouble with the concept. Bulgaria is hardly the first government to strangle an industry with price controls.

The immobilizing consequences of Bulgaria's fuel shortage came at a time of political crisis, which they naturally aggravated. Under pressure from the opposition Union of Democratic Forces (UDF), the elected Socialist party has agreed to hold elections in April, just 21/2 years into what might have been a 4-year term. The decision followed a month of strikes and protests among a population ravaged by economic hardship. Inflation is said to have reached 50%/month.

Problems with Bulgaria's already restructured foreign debt led the International Monetary Fund to propose replacing the central bank with a currency board. The UDF wanted to pursue the change and ended a parliamentary boycott long enough to try to pass the necessary legislation, but the Socialists, most of them former Communists, blocked the effort. The country thus seems destined to sway on a stormy precipice until a viable government is in place.

As usual, political drama obscures economic principle. Bulgarian President Petar Stoyanov draws attention when he proclaims that his country has come as close as it has ever done to civil war. If already-tense Bulgarians are like most of the world's peoples, they'll view new gasoline prices in a strictly political context and have something new to protest.

The price role

Yet the rest of the world must not overlook the economic lesson. Physical shortage and all the personal and political hardships that go with it do not happen where markets work, where prices are free to mediate between supply and demand. Where markets work, supply, demand, and price move continuously toward an elusive balance. The process is self-correcting, mightily resistant to extremes in any of its three basic dimensions.

Where markets work, consumers don't always like price levels. To the extent of their willingness to pay the going price, however, consumers in healthy markets never face physical shortage.

They're the lucky ones. Doubters should study Bulgaria.

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