Never in my life have I felt as smug as I did last week, while I drove past the unending queues outside fuel stations across London in my little electric i3 car, as people complained, ranted and got into fights for fuel. Although it was yet another reminder of how brittle social structure is and how much of a veneer civilisation can be. And as with any such situation my thoughts immediately went to the work of Jay Forrester and system dynamics. In the 1950s Forrester showed how signals can be amplified through a chain of participants so that a small disruption can turn into a tidal wave of anticipatory hoarding, thereby become a kind of self fulfilling prophecy. So as rumours of fuel shortages started to circulate, people started to tank up in anticipation. Which meant a sudden spurt of demand which the fuel stations were not ready to handle. Which meant that some fuel stations ran out of petrol and diesel. Which meant that the rumours of shortages gained momentum and at least in a localised manner were actually true for some stations. Which caused more people to rush out to refuel, and before you know it, there’s a full blown fuel crisis with miles of cars queued up for hours hoping to get enough fuel to last them a week. We saw this earlier with toilet paper as well at the start of the pandemic. That rumour was started on the back of news that a couple of factories in Asia were going to switch their production lines from toilet paper to masks. Cue a global rush for stockpiling toilet paper. I’m sure there are people who are still working through the hoard they collected back then.
What Forrester showed was actually more sophisticated. He showed that faced with such artificially inflated demand, the fuel stations in this case would start ordering more to keep themselves ahead of the market. This would lead to the distributors ordering even more, which sends signals to production, and before you know it, you’ve gone from a shortage to over-supply of a commodity. Fuel doesn’t behave like all other commodities as the production is cartel controlled to keep prices at a level. But this kind of behaviour is typical in a lot of areas, and it only subsides over a series of progressively smaller waves of demand and supply excesses.
Why do these shortages happen in certain goods? Are they all just baseless rumours? Well, in a lot of cases there is a kernel of truth in the shortages, but the magnitude of the felt impact is exponentially larger than the actual shortage because of the impact of system dynamics. There is actually a shortage of delivery drivers to take fuel from the depots to the petrol stations. The delivery shortage, which is a logistics (rather than production or supply) problem, is also a time bound problem and acting earlier may have had a significant impact, quite apart from the lack of conviction in the solutions being proposed now.
What else is in short supply? You mean apart from toys, Turkeys, Cars, Milk, Appliances, Meat, Coal, Energy Companies, Containers, Skilled Labour, and bizarrely, Carbon Di-Oxide (CO2)?
We know that constraints in the microchip production is going to hit a number of categories. Something we covered at length in our earlier look at microchips and Moore’s law. Cars, appliances, and computers will all be hit by this.
There is likely to be an ongoing energy constraint. As the UK has a high volume of wind dependence, the relatively low winds of the last few weeks has meant a drop in renewable energy production which will need to be filled with other sources, and Europe is facing an energy shortage as we speak. Natural gas which is the coal substitute of choice, is also in short supply across the world. Russia is a key exporter but will experience its own demand surge in winter. The shortage may affect production and have knock on effects on other unrelated goods too. Gas prices have gone up by 500% in the past year.
The shortage will also impact sustainability goals if economies have to revert to coal. And given the lead time for production, there’s a chance that a severe winter will simply be something we can’t deal with. And even coal may be in shortage.
The shortage of truck and HGV drivers will impact milk, meat, and other grocery supplies. Expect panic buying and queues. Beyond local deliveries, there is also a worldwide container crisis as global cargo container’s are apparently in the wrong places, thanks to the spike in post pandemic shipments. And of course there was the Ever Given imbroglio — a blockage giving the entire global supply chain a few weeks of indigestion. John Lewis recently had to charter a ship to ensure supply of Christmas goods.
Energy Utility companies are an endangered species. Thanks to the soaring energy prices (which consumers don’t face because of price caps), a whole slew of new energy companies — often known as the challenger brands — have had to close shop. The gas price hike has also hit the production of fertilizer as factories have been shut, and CO2 is a byproduct which is also hit by the closure. CO2 is used for aerated drinks, in green houses, and in cold chains as dry ice. So yes, your pint at the pub is also at risk.
There are any number of opinions on what causes the shortages — the pandemic, brexit, climate change, geo-politics, and national policy changes (such as IR35), to name just a few usual suspects. But it’s probably accurate to say that while any one of them are the trigger, they all contribute to making the problem more complex or intractable. Which makes the following three lessons inescapable.
3 Lessons:
First, as Douglas Adams (or Dirk Gently) might have said, we need to understand the fundamental inter-connectedness of all things. Or to put it in more contemporary management-speak — we need to be far better at building systems-thinking. Jay Forrester’s work is a subset of this. Understanding the externalities and interconnectedness is critical to even start addressing the unintended outcomes of our actions — especially for policy-makers. This can be hard, given the strange world of externalities. I read recently that the introduction of the iPhone caused the chewing gum industry to go into a 10 year decline because shoppers were glued to their phones at checkout and weren’t tempted by the displays that are normally set up around the queues. Who would have thought that the pandemic and crypto mining would push demand for chips up to a point where auto makers would have to shut factories down because of supply shortages?
Second, the collective impact of climate change and the black swan events such as pandemics will create more shocks in the system at an increasing pace. We know the acceleration of the climate impact is creating more adverse climate events every year, but equally the advancements in genetics, bio-tech, and other technologies, coupled with the increased levels of nationalism represent a high risk of pandemic style events occurring again. Events for which we may have no immediate protection because they are entirely new mutations of problems or diseases.
Third, our highly tuned and super efficient global systems, are not designed for resiliency. And can easily be put out of kilter as we can see all around us. In fact most aspects of the global economy of goods and services is designed for efficiency. Until we can get ahead of climate change, pandemics, and other events out of our control, we need to redesign for resilience.
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