Breaking Through the Gas Ceiling: The Ineffectiveness of Government Imposed Price Controls
Lindsey Yock
Edina High School
Edina, Minnesota
Wilted after a long day's work, John Doe now finds himself waiting in an endless line at the Union 76 Station in Minneapolis. In his car, listening to Peter Paul and Mary's "I'm Leaving on a Jet Plane," John wonders about paradise. Today, Dec. 19, 1973, he decides paradise is Tahiti and a gallon of gas. Right now, he'd prefer the gas. Ironically, an impromptu vacation to Tahiti is more plausible than a full tank. Dry stations like the Union 76 Station in Minneapolis in 1973 were the norm and not the exception during the shortage of petroleum induced by the embargo of the Organization of Petroleum Exporting Countries (OPEC). The crisis was instigated by Arab countries as retaliation against Western nations supporting Israel in the Yom Kippur War of 1973. OPEC, being dominated by Arab countries, didn't hesitate to organize and implement a petroleum embargo ("Refining blame for oil prices"). The embargo caused the price of crude oil to quadruple in less than two years, and the Arab nations cut production by 5 million barrels per day ("Yom Kippur War'). In attempts to control inflation, the U.S. government responded to the oil embargo by putting into effect a price ceiling on gasoline, in practice only exacerbating the situation. This is where a mountain of economic crisis grew from a molehill of economic stress.
A price ceiling is "the maximum legal price a seller may charge for a product or service" (McConnell and Brue) and is imposed below equilibrium price and output. A price ceiling legally interferes with the free market, but the question is whether this interference, although "legal," is beneficial. When a price ceiling is implemented, nearly all ensuing effects are negative, rendering its employment both useless and harmful. Perhaps the major malaise is the persistent shortage caused by the tampering with the market. When the ceiling, imposed BELOW equilibrium price and output, is active, the quantity demanded exceeds the quantity supplied. Enter shortage. This gap between the quantity demanded and supplied accounts for empty gas pumps. More people sought gasoline than could have it, and consequently retailers like Don Roberts had to turn away business. Both retailer and consumer were negatively affected by the existence of a price ceiling.
To add insult to injury, the government made the market less efficient by forcing it away from natural equilibrium. With a price ceiling imposed, no longer are marginal benefit and marginal cost equal. Instead the marginal benefit of making additional unit(s) available exceeds the marginal cost of the action. Society would prefer that more oil be made available for consumption. The market would run best if left alone, at equilibrium. The market operates less optimally under a legally imposed price ceiling.
An additional ill effect from price ceilings is that they eliminate a fundamental process in the free market: They eliminate the rationing function of prices. Under normal conditions, the consumer's willingness to pay for a good or service helps determine to whom the service goes. If no one is given an opportunity to pay a higher, more retailer-friendly price, retailers have no ability to discern where to sell their goods or services. Consequently, a new rationing determinant must be developed. In the 1970s during the oil embargo, that substitute rationing function became the unending lines at gas stations. If consumers wanted or needed gas badly enough, they would endure the grueling waits at Union 76 stations across the nation, although waiting in line did not ensure a tank of gas.
If price ceilings seem to not have caused enough damage, witness yet another malignant effect of their imposition. Under the scenario in which a price ceiling exists, a Black Market forms (McConnell and Brue). Because many buyers are willing to pay more than the ceiling price to attain the highly demanded "good" of the shortage, an illegal market charging a price unlawfully above the legal limit develops. The creation of an illegal organization and operation harmfully affects the character of society.
The grimness of the 1970s and early '80s raises the frightening question of whether the economic problems of that era could recur today. The answer, if one is specifically examining the petroleum market, is "it is unlikely." After the massive shortages of the '70s, the United States created the Strategic Petroleum Reserve to "ensure that never again would the United States be so vulnerable to market manipulation and politically driven supply interruptions" ("Crude Policy"). This issue is becoming increasingly pertinent as current oil prices increase. In the past year, the price of oil has tripled from $11 a barrel to $30 a barrel ("Surge in Oil Prices ..."). Today more than a half-billion barrels of crude oil are stored in reservoirs around the Gulf Coast, ready for an emergency. But what is an emergency? US law states that to release up to 30 million barrels a circumstance, a situation needs to exist that "constitutes, or is likely to become, a domestic or international energy supply shortage of significant scope or duration" ("Oil and OPEC"). Theoretically, the United States is prepared for a temporary supply interruption. Another weapon in America's defense arsenal is the threat of opening the reserve. That threat "helped keep oil prices down during the Gulf War, even when Saddam Hussein set Kuwait's oil refineries ablaze in a black inferno" ("Fuel for Thought").
Among these preventative measures and powers, there is even one more effective factor that shields present-day America from her vulnerability of the '70s. That factor is the consequences of the significant advances in technology. Technology has advanced in quantum leaps and bounds. Specifically, the Internet has begun to be the engine of industry, replacing conventional fuel as the driving force of production. Another benefit of technology is that it is not highly energy dependent.
Independent from technological advances, oil has seemingly passed from its most glorious days. Although since the 1970s, we have discovered more efficient ways of obtaining oil as well as new oil deposits, and producers can now manufacture more product with a given quantity of oil than before, manufacturing makes up a fraction of our economic output compared with the past. Today we manufacture one-sixth of our economic output, compared with one-fourth during the '70s ("Surge In Oil Prices ?").
Although on paper a price ceiling is an appealing way to try to bandage an economic wound, in practice it only worsens the ailment it is designed to heal. The price ceiling imposed by the US government in the 1970s hurt our economy as much, if not more, than the oil embargo that created its existence. Policymakers of today should learn from the past, paying special attention to the ill effects a price ceiling brings to society and the economy. Hopefully, if a similar scenario were to occur, we would weigh the consequences before applying government intervention.
Endnotes
"Commentary/Refining blame for oil prices." The Patriot Ledger Quincy, MA. Online posting on CNNfn. 26 Feb. 2000.
"Crude Policy." Bangor Daily News, ME. Online posting on CNNfn. 26 Feb. 2000.
"Fuel for Thought."The Washington Times. Online posting on CNNfn. 26 Feb. 2000.
McConnell, Campell P., and Stanley L. Brue. Economics: Principles, Problems and Policies. New York: McGraw-Hill, Inc., 1996. (411-412).
"Oil and OPEC." Bangor Daily News, ME. Online posting on CNNfn. 26 Feb. 2000.
"Surge in Oil Prices is Raising Specter of Inflation Spike." New York Times 21 Feb. 2000, natl. ed.: Al+.
"Yom Kippur War—Arab Oil Embargo." WTRG Economics. 29 Feb. 2000.