Sunday, September 23, 2007

Chains of Dependency

The supply of a finished product or service typically depends on several inputs which contribute to its “cost,” what the producer and others paid to acquire, assemble, and deliver all of the components of the item. Everyone in the “value and supply chains” also adds a “profit” to the purchase price, a reward that in a healthy economy is used to keep them in business when supplies fall short and they need to acquire more, find substitutes, or grow their businesses to offer other types of items.

Generally as the price of something goes up, people (buyers) will try to find cheaper substitutes, reducing the demand and therefore the amount of money (and profit) received by the original supplier (including the supplier’s associated chains of production and delivery). This also provides an incentive for the supplier to maintain supply.

Since energy is an input to all products and services, it is no wonder that its price driven by the cost of extracting fuel, processing it and delivering it – affects the price of everything. As supplies of fossil fuels drop and people realize that they can’t increase, more money will be spent on alternatives. Believers in a free market economy (and the dubious assumption that the world economy approximates one) sustain the hope that “the market” will be able to replace the fossil fuel supply before it runs out. Unfortunately for them and us, there are hidden costs that make the problem much more complex, and are reducing the available time even more than consumption alone.

No comments: