Why doesn’t the President freeze gas prices?

October 19, 2012

Dear Cecil:

My wonderful father, born in 1939, insists high gas prices are the only reason the economy is in the tank (no pun intended). He constantly tells me Richard Nixon was able to stave off economic hardship for our country because he froze gas prices during his presidency and that if Obama truly wanted to improve the economy, all he would have to do is freeze gas prices too. Did Nixon actually freeze gas prices? Could Obama, if he wanted to, do the same so I could pay $2 per gallon instead of $3.30? Or is Obama really trying to destroy the country and push his socialistic/communist agenda (my dad’s words, not mine) by making us pay higher prices at the pump?

Cecil replies:

Don’t get thrown off the scent by your old man’s red-baiting, Naomi — he’s the real Bolshevik around here. Controlling prices is what communist central planners did in the old days, and what leftist rabble-rousers like Hugo Chavez of Venezuela do now. Thankfully, there’s little chance of it happening in the U.S. Our last experiment with socialism, during the administration of that well-known Marxist Richard Nixon, was convincing proof that government-dictated price controls don’t work.

In August 1971, hoping to dampen rising inflation, Nixon declared a freeze on wages and prices. Initially the freeze applied to everything, later just oil and gas. World oil prices were fairly stable during this time; not surprisingly, so were gas pump prices. If you weren’t paying much attention, you might think the price freeze had worked.

Then came the real test. On October 6, 1973, Egypt and Syria attacked Israel, igniting the Yom Kippur War. Nixon sent money and supplies to Israel. Partly in retaliation, the Organization of Petroleum Exporting Countries (OPEC) announced a 70 percent increase in the price of oil, and not long after Arab countries declared an embargo on oil exports to the U.S. Oil production was cut 25 percent.

A cease-fire ended major fighting within weeks, but skirmishes continued through the winter, and the Arab states kept up the oil embargo till March. By then world oil prices had risen from $3 a barrel to $12. Amid calls for rationing, worried U.S. consumers formed long lines at gas stations; some operators ran out.

What effect did the Nixon price controls have on all of this? Not much. The pump price of a gallon of gas in the U.S. rose from 38 cents in May 1973 to 55 cents a year later — a laughable amount now, but a big jump then. Scholarly analysis of the Nixon controls suggests they had only a trivial impact on gas prices.

Why? The immediate reason is that Nixon’s price controls applied only to U.S. oil production. Domestic petroleum output was then in decline, dropping from 79 percent of U.S. consumption in 1970 to 64 percent by 1975. Even so, roughly two-thirds of the oil we used at the time was produced within our own borders, and a good chunk of that was subject to price controls. Why then did the rising price of foreign oil drive local gas prices so high?

The answer has to do with a basic but often baffling economic concept called marginal cost. The idea is this: in a perfectly competitive market, price is determined by the cost of producing one more unit, in this case a gallon of gas. With U.S. demand greater than U.S. production, then as now, those additional units had to come from expensive foreign oil. Since gas was gas and nobody was willing to pay a price differential depending on where the oil was pumped, the price of all gas went up.

Your father may say: Hold on. If the price of gas is effectively determined by the cost of the most expensive oil used to make it, that means oil companies with access to a lot of cheap domestic product made out like bandits.

You got it, bubba. The Carter administration tried to address this problem with a windfall profits tax. Whatever may be said for the wisdom of that strategy, it had little impact on pump prices.

If you really want to keep the price of gas down, and I mean way down, the only proven solution is to nationalize the oil companies and control the price directly. Hugo Chavez did that, and the price of gas in Venezuela is the lowest in the world, recently under 10 cents a gallon. This may be your father’s idea of paradise. It’s also socialism, and we’re not talking about the current right-wing nutcake idea of socialism, meaning anything Obama does, but actual socialism.

Happily for us, and I say this without sarcasm, we don’t have socialism in this country, we have the free market. When gas prices are high, the market is telling us a lot of people are competing for a scarce resource. If you don’t feel like spending so much and don’t want to move to Venezuela, your only choice is to quit whining and figure out some way to use less.

Related Posts with Thumbnails

References

Blinder, Alan S. and Newton, William J. “The 1971-1974 Controls Program and the Price Level – An Economic Post-Mortem” Journal of Monetary Economics 8 (1981): 1-23.

Davoust, Romain. Gasoline and Diesel Prices and Taxes in Industrialized Countries European Governance and the Geopolitics of Energy, December 2008.

Eldred, Sheila “How Gas and 'Petrol' Prices Feel Different” Discovery News 25 May, 2012. Online, accessed 1 October, 2012. http://news.discovery.com/autos/psychology-gas-prices-120429.html

Hammes, David and Wills, Douglas. “Black Gold: The End of Bretton Woods and the Oil-Price Shocks of the 1970s” The Independent Review (Spring, 2005): 501–511.

Issawi, Charles “The 1973 Oil Crisis and After” Journal of Post Keynesian Economics 1.2 (Winter, 1978-1979): 3-26.

Kim, Myeoong hwan and Park, Kwang Woo “Did the price control achieve its goal?” Economics Bulletin 29.2 (2009):

Martin, Daniel. “We're the fuel tax capital of Europe: British motorists pay up to 60% duty and VAT on petrol - the highest figure in the EU” Daily Mail 28 February, 2012. Online edition, accessed 1 October, 2012. http://www.dailymail.co.uk/news/article-2107374/Fuel-tax-British-motorists-pay-60-duty-VAT-petrol.html

Taylor, Jerry and Van Doren, Peter “Economic Amnesia: The Case Against Oil Price Controls and Windfall Profit Taxes” Cato Institute Policy Analysis 561 (2006).

The Straight Dope: How is the market price established for crude oil? http://www.straightdope.com/columns/read/2671/how-is-the-market-price-established-for-crude-oil

United States Department of Energy. Annual Energy Review 2011. Accessed 1 October, 2012. http://www.eia.gov/totalenergy/data/annual/pdf/aer.pdf


Recent Additions:

A Straight Dope Classic by Cecil Adams
A Straight Dope Classic by Cecil Adams
A Straight Dope Classic by Cecil Adams
A Straight Dope Classic by Cecil Adams
A Straight Dope Classic by Cecil Adams
A Straight Dope Classic by Cecil Adams
A Straight Dope Classic by Cecil Adams
A Straight Dope Classic by Cecil Adams
A Straight Dope Classic by Cecil Adams
A Straight Dope Classic by Cecil Adams
A Straight Dope Classic by Cecil Adams
A Straight Dope Classic by Cecil Adams
A Straight Dope Classic by Cecil Adams
A Straight Dope Classic by Cecil Adams

Send questions for Cecil Adams to: cecil@chicagoreader.com

Send comments about this website to: webmaster@straightdope.com

Terms of Use / Privacy Policy

Advertise on the Straight Dope! Your direct line to thou- sands of the smartest, hippest people on the planet, plus a few total dipsticks.

Publishers - interested in subscribing to the Straight Dope? Write to: sdsubscriptions@chicagoreader.com.

Copyright © 2014 Sun-Times Media, LLC.