Price controls on gas may fuel market distortions

Disco. Earth Shoes. Pet rocks. Eight-track tape players. Jimmy Carter.

Please, let’s not go back to the 1970s.

They’re trying in Hawaii, imposing gasoline price controls that well could bring back that horror of the 1970s, gas lines.

The only state with higher average prices than California, the Aloha State will soon put into effect a new state law slapping a ceiling on gas prices, reported the Aug. 25 Sacramento Bee. It seems to be the first such price control on gasoline in the United States in more than two decades.

The law isn’t completely inflexible — the ceiling will be based on wholesale prices in the 48 mainland states. However, the Hawaiian islands are an isolated market; such markets generally bring more price fluctuations than larger markets, such as the U.S. mainland.

But any interference with the price mechanism will cause market distortions, possibly including the long gas lines such as those precipitated by the price controls of the 1970s. The gasoline crisis ended in 1981 when President Ronald Reagan abruptly ended gas price controls. They had been on a gradual path toward elimination by 1985, under a law signed by Jimmy Carter in 1979.

Price controls are a bad idea because they don’t take into account the reality of supply and demand, said Esmael Adibi, director of the Center for Economic Research at Chapman University in Orange, Calif. He said gas and oil prices now are high because demand is high, not only in the United States, but across the world, as China, India and other emerging economies grow rapidly.

Worldwide supplies actually are “adequate,” he said. But the problem is there’s a lot of uncertainty about those supplies because of the war in Iraq and political turmoil in Saudi Arabia and Venezuela, all major oil-producing regions, as well as the disruption of supplies caused by Hurricane Katrina.

Adibi added there’s a tendency for “markets to overdo it” up or down, and reminded us how it was just in the late 1990s when gas prices — fasten your seatbelt — briefly plunged below $1 a gallon.

Moreover, an Aug. 23 study by the Mises Institute showed that $67 a barrel oil price still is well below the top price of almost $100 reached in 1980, when adjusted for inflation.

Adibi urged that Americans be patient. High prices do two things to encourage a later reduction in prices: They discourage use (people buy smaller cars or skip vacations); and they encourage more production. Both result in an increase in supply, which always reduces prices.