Shortages and prices

From time to time, I see threads about shortages. I have read about shortages of people - STEM educated, nurses, teachers, engineers. I've read about shortages of commodities - gas, propane, water, copper.

For most things, I have an easy method I use to check for shortages. What is happening to the price? If the price is free to move, it can tell you whether the shortage is real or just hype. If something is really in short supply relative to the demand, its price will go up. If it isn't really in short supply, the price won't go up.

This technique doesn't always work. Sometimes the prices either aren't set by supply and demand or the market is slow to adjust. You can't use this technique, for example, to see if we have a shortage of fighter jets in this country because the price of fighter jets isn't set in an efficient market.

Is there a shortage of people with STEM degrees? Are the salaries of people with STEM degrees increasing significantly faster relative to salaries in general? If not, there is currently no shortage.

Is there a shortage of propane? Is the price of propane rising significantly faster than inflation? If yet, than there is a shortage.

Just knowing that there is a shortage doesn't tell you why there is a shortage. Propane may be in short supply because demand increased more rapidly than supply could be made available. It may be in short supply because a large producer found that they could make more money producing less of it. It may be in short supply because something in the supply chain made it difficult to bring to market.

In some cases, prices can even tell you if something is likely to be in short supply in the future. You can buy and sell many commodities in the futures market. You can look at the futures price to see what the people buying and selling something in the future think the price will be.

I occasionally see people say that gas prices are going to skyrocket in the next few years. When I checked the futures markets, I saw that gasoline prices in 2017 are 10% to 20% lower than they are today.

These futures markets are very far from perfect. Sometimes things happen that they didn't predict and the price moves much higher or lower than people expected. Using my gasoline example above, if you think that something is going to happen to drive up wholesale gasoline prices between now and 2017, you can make some money. You can buy 2017 gasoline today and, when other people finally realize that you were right and start bidding up the price of 2017 gasoline, you can sell it. If you buy and sell commodities because you think you know more than the people buying at the market price, you are speculating. By itself, it isn't really evil. It's a way to bring information (your superior understanding of what will happen in the future) to the market. The problem with it is that speculators sometimes become manipulators, taking out large positions and then using other power to force the market to move in the direction that they want.

I think I'm starting to wander a little far afield from the original inspiration for this thread. My main point is that, when someone is claiming that there is a shortage of something that is traded at a market price, the best way to see if what they say is true is to look at prices. If they make predictions about future shortages for things traded in futures markets, you can check to see if their prediction matches what people with lots of money at stake think will happen. That isn't the same as checking to see if they are right or wrong (they may be right and the market may be wrong), but it gives you some context. Finally, if you see someone with a lot of money making predictions about future prices, ask them how much money they have invested in futures markets. If they haven't put much in, that may be an indication that they aren't really very confident in what they are saying.

Here's what I've seen:
STEM Employees - not much of a price rise, so this is BS

Water in the west - some price rise, but not matching the hyperbole in the news

Nurses - Rising faster than other wages, but not at extreme rates

Copper - When there was a lot of talk about our running out, futures prices were higher, but not that much higher. Mostly hype.

Propane - Prices through the roof. Real shortage. Why? Prices didn't tell me and I don't know enough about the market for propane to say. My guess is that the cold whether late in the season caused demand that suppliers had trouble meeting. Is the market competitive enough or did suppliers have an incentive to be slow to bring on supply so that they could make a lot of money on the higher prices?

Teachers - That's such a weird market that it is hard to say. Prices haven't risen very much, but schools could be getting by hiring lower quality teachers than they did in the past. This is a case where markets don't tell me enough.

IT Salaries - I see people that can't find work at almost any price and others getting well over $100/hour and even $200/hour. This tells me that there are a lot of different markets for IT people and you cannot substitute one for another easily. Some niches have extreme shortages and others have extreme gluts.