A fuel crisis is just like a financial crisis

Watching the news and the vast queues at the petrol stations last week, with excessive demand causing the shortage feared in the first place, puts me in mind of a run on a bank.

There was no immediate problem with the quantity of fuel available.  There was a rumour of a strike, and that combined with some less judicious comments from our political leaders led some people to think there might be a shortage.

So they go to the petrol station and fill up. They buy a bit more, a few days earlier than the might have. Another driver, seeing the normally quiet petrol station busy, thinks “There might be something to this story….I’d better fill up too” and before you know it, the queue for petrol is so severe the policing are closing the roads, garages are rationing supply and some are running out. “The madness of crowds” strikes again.

A run on a bank follows a similar pattern. There’s a rumour, which may have no substance whatsoever, that a bank X is in trouble. Those who have money deposited with the bank move to withdraw those funds. Other institutions see the cash outflows, and stop lending (risking) their money to X. X cannot pay all its depositors and you have the first domino falling, unless the central bank or other lender of last resort steps in.

When the central bank support for X becomes known, the immediate reaction of a depositor will be (a) do I have any money with X – if I do I’ll get it out now and (b) is my money safe with bank Y? If I also know that Y has lent money to X the problem spirals…and you have a full blown financial crisis.

Now substitute countries from banks, and you’ve got a pretty good pattern of what has been happening in Europe.


About timluscombe

Tim is a speaker and corporate finance advisor who takes complex issues and presents them in plain English. He's a partner in www.klopartners.co.uk
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