Breaking Through the Gas Ceiling: The Ineffectiveness of Government
Imposed Price Controls
Edina High School
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
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.
"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.