With the effects
of Hurricane Katrina sending gas prices to new highs, politicians
across the country are looking for easy answers. Some politicians
are threatening action over "price-gouging" in Louisiana, and
another state, Hawaii, is about to take the most direct action
possible-it is implementing a 2004 law setting price limits on
gasoline. At first blush, setting prices may seem like a sensible
solution. But the United States has tried oil and gasoline price
controls before, when the federal government implemented them in
the 1970s, and they were an unmitigated disaster. In fact, the
attempts by Washington to force down prices during that decade
backfired so badly-resulting in shortages and gas lines-that they
should have served as a permanent cautionary tale. Policymakers
should leave the market to do what it does best: allocate limited
resources to their most valuable uses.
Many remember the
high prices and gas lines of the 1970s and blame the OPEC oil
embargo and the effects of the Iranian revolution. But in truth, we
were our own worst enemy. Begun by President Richard Nixon, but
retained by Gerald Ford and made more complex under Jimmy Carter,
the government set limits on the price of oil, as well as some
limits on gasoline prices.
By setting prices
below market levels, the government made it unprofitable for market
actors to respond to high prices in the usual way-by increasing
production. The unintended (but predictable) effects were
inadequate supplies and fuel shortages. Then, rather than lifting
the price controls, the government tried to fix the problem by
imposing allocation controls. Soon, we had centrally-planned
programs determining how much of various fuel types to produce, how
much to send to each state, and how much various categories of
purchasers were allowed to buy. Thanks to the feds, we were not
producing enough fuel and were doing a lousy job
distributing it.
Government
intervention became a vicious circle of one ill-conceived dictate
after another, hurting the driving public and the overall economy
at least as much as the actions by OPEC countries. As one energy
analyst noted about the Iranian revolution,
The gasoline
shortage was very small, perhaps 3 percent. Absent price control,
there would have been a price increase, less than what actually
occurred. But given price control, there had to be allocation:
product by product, week by week, place by place … Scattered
shortages led to hoarding and panic buying and worse shortages
yet-and those gasoline lines. No other consuming country cooked up
this kind of purgatory for itself.
It was not an easy
time for energy companies, but consumers, the supposed
beneficiaries of price controls, suffered the most. As two leading
energy analysts put it, "In hindsight, the confusing swirl of
regulations that the government spewed out during the 1970s oil
crisis gave consumers the worst of both worlds-higher prices and
shortages."
In 1981, President
Reagan, in one of his first acts in office, swept away those price
and allocation controls and restored a more free petroleum market.
Prices soon dropped (and remained relatively low until recently),
and the gas lines disappeared. For the next two decades, nobody
thought seriously about repeating the mistakes of the 1970s.
Until now. Thanks
to a 2004 law set to take effect in September, Hawaii will
institute price controls. The Hawaii law has its own quirks that
distinguish it from past measures. For one thing, it applies only
to the wholesale price and is designed to ensure that the price in
Hawaii is no different than that on the mainland (due to logistical
costs and higher state gasoline taxes, Hawaii's gas is usually more
expensive). Nonetheless, if the controlled price is below the
market price, the end result will be the same as it was across the
U.S. in 1973 and 1979. We will likely see gas lines in paradise,
and because the retail price is uncontrolled, we may also see price
spikes there as well.
Perhaps it is a
good thing, at least for the other 49 states, that Hawaii is
willing to provide a timely reminder that price controls do not
work. After all, it has been a quarter century since the federal
government last made that mistake, and many of today's drivers are
too young to remember odd-even days, 10-gallon limits, and "Out of
Gas" signs.
Congress will
return after Labor Day, and the impact of Katrina on gasoline
prices is sure to be high on the agenda. Even President George W.
Bush has spoken out about gasoline "price-gouging" in Louisiana and
implied that the government will intervene-presumably by setting
some price cap. This would only serve, however, to reduce the
availability of gasoline in the hurricane-ravaged region and make
things worse. Hopefully, Washington remembers the lesson about
price controls that Hawaii is set to relearn the hard way.
Ben Lieberman is
Senior Policy Analyst in the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation.