Will There Be Another Gasoline Shortage?

Last night I was complaining to an acquaintance about having to spend $66 to fill the tank on my pickup truck. His response was similar to what I’ve heard everywhere. It’s all a joke. There is no shortage of oil or gas. The oil companies do this so that they can maximize profits. He then reminded me of the gas shortage in the 1970’s. Remember the long lines and doubling of prices? He has a relative who works in the industry. He claims that in the 70’s there was no shortage of gas, that they were capping wells in Oklahoma while gas stations ran out of gas. The contrived shortage allowed the oil companies to increase prices and profits. So says my friend’s friend.

Now, let me tell you the rest of the story. In the 70’s, OPEC had a strangle hold on the world oil markets. As an organization, OPEC met regularly to set production levels for all members. This was done as a way to limit production and keep crude oil prices high. It is still being done, but there are other issues now. At the time President Richard Nixon and his advisors were worried that increasing gas prices, and everything else for that matter, was going to wreck the economy, so someone came up with the idea of freezing wages and prices. Oil and gasoline price controls were a part of that plan.

You may wonder how wage and price controls could cause an gasoline shortage. Well, consider for a moment the people who owned producing oil wells during the seventies. As the price of crude oil climbed in response to OPEC production quotas, the U.S. producers were stuck selling a commodity of increasing value for a set price. Rather than pump their wells dry at an artificially low price, they simply stopped production. Less production, less supplies, and long lines at the pump for you and I.

Did President Nixon go on national TV to tell us that his wage and price control program caused the shortages? Heck no, he blamed OPEC. When the price controls were lifted in 1980, gasoline doubled in price. So you see, it was not just about an imaginary shortage that caused the oil crisis of the 70’s, it was government intervention.

We are all taught in school that the government is a collection of the best and brightest and that this collection of the best and brightest have our best interests at heart. The government hires world famous economists as advisors to the President because we believe that these people know what is going on.

The problem is that economics is based on theory and if your theory is flawed, your results will be as well. Since the days of Franklin Roosevelt, our government has subscribed to Keynesian economic theory. Not because is makes the most sense, but because Keynesian economics is based on the theory that a strong central government can control the economy, prevent panics and crashes, and smooth out the ups and downs of the business cycle.

A less popular but more accurate theory of economics comes from the Austrian school. The Austrian theory holds to the belief that the economy will naturally go through ups and downs, but in the end, pretty well takes care of itself. It also states that government intervention either by price controls or currency manipulation will only make the normal swings in the economy worse. In fact, intervention will eventually lead to a bust, like what we went through during the Great Depression in the 1930’s.

As you can guess, the government would never subscribe to Austrian economic theory as it cuts the government out of the picture.

So what does all of this have to do with gas shortages and price increases? Let me explain. Keynesian economics believes that retail prices vary based on wholesale prices. Adam Smith, an economist from the 19^th century struggled with his economic forecasts because he believed this theory to be true.

In 1871 Carl Menger published “Principles of Economics” and in this work, he solved the riddle and in doing so, made a significant contribution to the field of economics. His solution? Simply that the value of goods and services, read gasoline, is determined by what people are willing to pay.

Will gas prices continue to rise? Yes, as long as you and I are willing to pay the price. At some point, we will make drastic changes in our lifestyle, by moving closer to work, riding the bus or train, or maybe walking or riding a bike. When that happens the price of gas will stop going up. Government control doesn’t solve the problem it only makes it worse.

Consider this, in Europe; unleaded gas is over $6.00 a gallon. It looks like we still have a ways to go.