The Plumb Line: The Gas “Shortage”

Once again we hear of “shortages,” this time of gasoline. And once again, the blame is being spread around: from the “greedy” oil companies, whose greed seems to have taken a sudden upward turn; to the “wasteful” and “selfish” American public, which persists in trying to drive its automobiles. Californians, who have been hit most grievously by the shortage, are especially being lambasted by Easterners for their intense devotion to the ‘car culture.’ But again, Californians have not just discovered their cars in recent months; so why has there been no shortage before?

The first vital point to grasp is the key distinction beween scarcity and shortage. Every useful commodity or service, except air, is scarce. If it were not scarce, it would, like air, be superabundant, and would therefore be free. Since all goods are scarce, they command a price on the market. The relatively more scarce, the higher the price will be.

Thus, when, a few years ago, a large part of the Brazilian coffee plants froze, coffee became relatively much scarcer, and the price of coffee rose—to fall again when coffee production picked up in later years.

But note—there was never a coffee shortage. A shortage occurs when the commodity cannot be found by those seeking to buy it. Coffee production had fallen off, but it still could be found on the shelves. To put the point starkly, Rembrandt paintings are an exceedingly scarce item. They supply—barring the arrival of a super-successful forger. And yet no one ever complains of a Rembrandt ‘shortage.’ There are Rembrandts available for purchase—at $1-million or so apiece.

There is no shortage of Rembrandts because no government has imposed price controls upon them. Suppose, for example, that the U.S. government, in its wisdom or out of a presumed desire to help out art lovers, should declare a maximum price of $1000 per Rembrandt. ‘Why,’ it might ask, ‘shouldn’t the broad masses enjoy the purchase of Rembrandts?’ Why not indeed? And so, the sale of Rembrandts for higher than $1000 would become illegal, under whatever penalty the government might decree. (Since various hopped-up legislators have already urged jail sentences for those filling station owners anti-social enough to close their pumps, we can imagine how high the punishment would go.)

If the government should decree a $1000 maximum price for Rembrandts, then a Rembrandt shortage would appear overnight, as if by magic. Long lines of art lovers clamoring to buy Rembrandts would be faced by zero supply. Lines, black markets, fake Rembrandts, all would appear. And the black market price would be a lot higher than the original free-market level.

The price system, in short, performs a vital and smooth rationing function, moving up or down in accordance with the intensity of consumer demand and the relative scarcity of a product. There is never a shortage if prices are free to move; shortages are only a function of government price control. In a sense, we can have as severe a shortage of any item as we want; the bigger the gap between the controlled price and the free-market price, the more severe the shortage.

In the case of goods which, unlike Rembrandts, can continue to be produced, price controls will also discourage future production, thereby increasing the relative scarcity of the product and aggravating the shortage. If the government should suddenly decree that Wonder Bread can no longer be sold for more than 10¢ a loaf, it will not only cause an immediate shortage of existing loaves of bread, but also discourage future production.

So, if a shortage of any product ever develops on the market, the culprit to look for is not the climate, big business, human greed, or the state of the world. The villain to look for is government price control.

Sure enough, in the case of the current gasoline crisis, the culprit is there in spades. The 1973-74 gas shortage struck because an increased scarcity of oil ran up against President Nixon’s wage-price control program. The severe shortage disappeared, as if by magic, when the federal government reluctantly allowed gasoline prices to rise to clear the market by adapting to the new reduced supply. The current crisis is a legatee of Nixon’s disastrous system of controls. For price controls on oil and petroleum products continued, with prices fixed for crude oil and then up the ladder to retail gasoline, with arbitrary margins set over the price of oil at the previous stage of production.

At first, price controls were set at about market price. But, as general inflation proceeded throughout the economy, a gap began to appear between the free and the controlled price. To try to handle this problem, the federal government stepped in to take over the rationing function normally performed by the price system. That is, it imposed arbitrary allocation and rationing of the nation’s supply of oil and gasoline.

Government knows only one way to ration: the ‘fair’ way seems to be to spread the imposed sacrifice in some seemingly equitable manner. Almost always it does so by imposing percentage cuts from a base fixed at some period of time in the past. The federal government, for example, decides each month how much of the short supply of gasoline may be allocated to each filling station by fixing a uniform percentage of the sales by that station during the same month last year or some previous year. Thus, each gas station this June may be held to an allocation of 90 percent of the sales it made last June. But this system, of course, penalizes growing, booming areas, where demand for gasoline keeps increasing, and impinges scarcely at all on declining regions. That’s why the gas shortage hit particularly severely in booming California, while there was plenty of gasoline available in Philadelphia and Detroit.

Even before this year’s evident shortage, drivers had long noticed a marked decline in the quality of service at the filling station. Courtesy and attentiveness had declined, and free maps had disappeared. This, too, was the early result of the federal allocation system, which compelled the oil refiners to keep supplying their quotas to the local stations regardless of lack of quality service. That was this year’s gas shortage in embryo.

The gas shortage has been aggravated by the type of price control that the federal government has imposed. At each step of fuel sales, the seller is allowed to pass on any increase in the cost of oil or gas that he buys. However, he has not been allowed to pass on any other inflating costs, such as labor, rent, etc. As a result, no less than 20,000 gas stations have folded in California alone in the last couple of years. Another seemingly minor control has also aggravated the shortage. The typical gas pump is physically limited to three digits, and therefore cannot register a price higher than 99.9º a gallon. As the market price rises inexorably over $1, some gas stations have tried to meet the situation by charging for gas by the half-gallon, so that the price could register on the pumps. But some states have laws on the books prohibiting any sale except by the gallon.

Shortages are thus solely a product of government price control. But lest one may think that this completes the list of governmental sins in this area, the federal government has also done a great deal to increase the scarcity of oil, gas, and other forms of energy, and thereby to raise the market price and aggravate the gap between the market and the controlled price. Just some of the ways that the government has aggravated the scarcity follow:

(1) Worrying out of season about a possible heating oil “shortage” next winter, the federal government has, this spring, compelled more of petroleum to go into heating oil, and less into gasoline.

(2) To help out small refiners, the federal government has compelled more crude oil than before to go to very small outfits, many of which have sprung up overnight to take advantage of this subsidy. But these inefficient refiners get considerably less gasoline per barrel of crude oil than the larger, established refiners.

(3) The federal government compels all new cars to use only unleaded gasoline. Not only is unleaded more costly to make, but far less unleaded gasoline can be derived from each barrel of crude oil.

(4) Natural gas prices have been held far below the free market price by the federal government, thereby causing a shortage, particularly in interstate markets where these controls apply. The result has been (a) to discourage the search for new oil reserves, since oil and natural gas are often found together, and (b) to put more pressure upon the use of oil for heating purposes (5) A large network of government regulations has crippled the production of coal, which again puts great pressure on oil resources.

(6) The federal government is sitting on vast naval oil reserves in Wyoming and California, which it has refused to allow into production since the turn of the century. What is it waiting for—some rainy day centuries hence when a few of its battleships will need some oil?

In short, if the federal government got out of the price control business, the gas shortage would disappear entirely overnight. True, the market price for gasoline would be higher, but a lower price does us little good if we can’t obtain the product. Then, if government got out of the business of creating artificial scarcities of oil and gas, the supply would become more abundant, and the market price would fall.