In January 2020, the Harford family filled a spare cupboard with pasta and tinned food. Our “Brexit cupboard” was intended to protect us in case there were disruptions to trade after the UK left the EU on January 31. As I pointed out to my wife, it was probably pointless: any issues would be minor and were more likely to affect perishables than pasta. Still: the Brexit cupboard cost little and afforded some gallows humour, so why not?
A few weeks later, the Brexit cupboard became the pandemic cupboard, and we felt lucky to be sitting on a small mountain of tagliatelle.
Storage is one of the least sexy words in the English language. This is a problem, because when a crisis hits, it’s too late to start building an extra cupboard, then filling it with supplies. Modern economies have shown themselves to be remarkably adaptable in a crisis, but not infinitely adaptable. Some stockpiles of medical supplies would have been invaluable during the early stages of the pandemic.
More recently, the price of natural gas in Europe went negative: you could get paid to burn gas. This was an astonishing development given how exorbitant gas prices were over the summer, but it is easy to explain. Households and businesses have been saving energy, while European nations have been desperately trying to fill their gas reservoirs, from tanks to underground caverns. The capacity to conserve and import gas briefly outpaced the capacity to store it.
This is good news. It would be better news if a few more of those underground caverns were available. (The UK has little such storage, even now that the decommissioned Rough facility off the coast of Yorkshire has been reopened. It is unlikely to be able to operate anywhere near its pre-closure capacity.)
It is tempting to conclude that we simply don’t invest enough in storage; that everyone should have their own Brexit cupboard, that governments were grossly culpable in not maintaining good stocks of medical supplies, and that closing the Rough facility was utter foolishness. But is this clamour for more storage simply hindsight talking? Storage is often expensive, and there is no end to the list of things that could be stored — pasta when the need is for vegetables; ventilators when the need is for bioreactor linings to make vaccines. Whenever a crisis emerges, we regret not taking more precautions, but the cost of taking every possible precaution might be more than the cost of the occasional shortfall.
Still, there are reasons to believe we do underinvest in storage. First, the market for storage is stigmatised. Consider the following simple business model: I build a storage facility, and when times are good I fill it with tanks of cooking gas, sacks of rice, shelves of bottled water, and bundle after bundle of toilet paper. Then, when the crisis hits, I triple the prices and sell my stock. To an economist, this is a noble endeavour. I’m taking a risk. I’m encouraging the producers of gas, rice, water and loo paper to keep going when prices are low. I’m meeting the needs of consumers who otherwise face empty shelves. Because of my investment, the low prices are a little higher, and the high prices a little lower — in other words, my speculative profiteering is actually reducing volatility. But will anybody thank me for any of this? Of course not.
In a landmark 1986 study, Daniel Kahneman, Jack Knetsch and Richard Thaler gathered evidence that most people find this sort of behaviour unacceptable. (For example, 82 per cent of respondents thought it was unfair for a hardware store to raise the price of snow shovels after a snowstorm.) We could argue over whether these feelings of outrage at “profiteers” are simply mistaken or tap into some deeper wisdom, but the practical point is that firms know that they will be criticised if they build up stores and try to sell them at a profit in a crisis. As a result, they will spend less on storage than they should.
A second problem is that supply interruptions have a large social cost. The cost of a blackout falls partly on the electricity supplier but mostly on customers, and so the supplier is likely to skimp on storage, backups and other ways to improve reliability.
Then there is the third problem, which is that some kinds of storage are extremely expensive. Electricity storage is a particularly urgent example given the rapid and welcome shift of electricity generation to intermittent wind and solar. The price of batteries has plummeted, but they are still costly and work only briefly. Pumped hydroelectric power is cheaper, but no trivial feat — it involves pumping whole reservoirs uphill when electricity is plentiful.
Could the storage problem be solved? Governments could subsidise some forms of storage and stockpiling, from gasfields to battery factories. They could do more to encourage trade and collaboration, as these are — sometimes — substitutes for storage. And they could invest more in early warnings of trouble. They will need to stand ready to resist the inevitable grumbles that the stockpiles constitute a waste of taxpayers’ money. But to list this set of ambitions is to understand that the storage problem will always be with us.
For now, the Brexit cupboard remains well stocked. I just wish it was well stocked with electricity and gas.
Written for and first published in the Financial Times on 9 December 2022.
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