In 1973, the Arab members of OPEC imposed an oil embargo on the United States and several other countries in retaliation for supporting Israel in the Yom Kippur War. This supply constraint caused the price of oil to spike fourfold. To control this wild swing in prices, the U.S. government imposed a price control on domestic oil to prevent it from rising. The price control had very predictable effects: it caused the shortage. When markets are left alone, they are very adaptable to changing conditions, such as a spike in demand or a constraint on supply. Today, the 1973-1974 energy crisis is used in economics textbooks on how stupid government policy make shortages worse.
A price is more than just a sticker on the shelf. A high price encourages consumers to shop around, to consider their options, or to even not buy at all. If one consumer chooses not to buy, a different consumer might be willing to pay that high price. On the demand side of the equation, prices function to allocate scarce resources to those who want it most. Conversely, a high price encourages producers to supply more because they will make a higher profit. If a rate of profit is high enough, a producer might stop doing unprofitable ventures and instead focus on where they make the most money. On the supply side of the equation, prices function to allocate scarce resources to produce goods and services that are most desired.
All that goes out the window when prices are too low. When the government prevented the price of oil from rising, which in turn affected the supply of gasoline, consumers faced no penalty for hoarding or panic buying, and suppliers had no reason to increase their stock. It was not uncommon to have long lines at a gas station, sometimes stretching for miles. By February 1974, 1 out of 5 gas stations was completely empty. This crisis was entirely caused by government price controls. In other countries which faced the same high oil cost, but no government price controls, gasoline was readily available.
A few days ago, one of the largest oil pipelines on the east coast was hit by a cyberattack. Very predictably, people are panic buying gasoline and there are already reports of several gas stations going empty. To alleviate this shortage, the price of gas (and oil) must be allowed to rise.
We probably won’t have the same national price cap on oil like we had in the 70s, but the most likely scenario is that state and local government will use anti-price gouging laws to go after any supplier who correctly responds to the crisis. Very foolish consumers plead with the government to “do something” whenever they see a price they don’t like. If you don’t want to pay $10 for a gallon of gas, then don’t. But don’t use the government to prevent other people from paying that much. Those people clearly want the gas more than you do. If the supply of gas is limited, it should go to the people who want it most, and those are the people who are willing to pay for it.
Do not repeat the same mistake of the 1970s. Do not impose price controls and don’t act shocked when prices rise, that’s what they’re supposed to do in a crisis.
Better yet, every state should abolish anti-price gouging laws.
William Smith lives in Fargo.
This column does not necessarily reflect the opinion of The Forum's editorial board nor Forum ownership.