Listen to the broadcast of You Tell Me on Newstalk 600 KTBB, Friday, March 14, 2008.
This radio station has a hard time going more than 15 minutes without running a story or saying something about the price of gasoline. That’s not without justification. The price is high, getting higher and one can’t help but notice. But if you’re old enough, I want you to remember the last time that gasoline prices constantly dominated the headlines. That time would be just about any day you wanted to choose in the 1970s.
Do you remember the long lines at service stations? Do you remember the 10 gallon purchase limits, the odd and even days based on the last digit of your license plate number? Do you remember?
The big news in the 1970s wasn’t that gasoline prices were high. They were. The big news was that gasoline wasn’t available at any price. And we all sat in long lines at gasoline stations instead of working or shopping or being with our families. The entire episode tanked the economy.
Ask just about anyone from that era what happened and they’ll tell you that gasoline lines were the result of the Arab Oil Embargo.
They would be wrong.
Economically speaking, the Arab Oil Embargo was a non-event. They didn’t “embargo” the United States. What OPEC did was vow to reduce oil production by five percent each month until the U.S. withdrew its support for the State of Israel. The fact was then and is now that the market for oil is worldwide. Once the product is loaded on a tanker, the producer has no control on where the tanker goes. The impact of the 1973 OPEC production cuts on world markets was trivial.
Gasoline came to be in short supply because of wage and price controls imposed under the Nixon administration in 1971, the effect of which prevented oil companies from passing on the full cost of imported crude oil to consumers at the pump. In the face of increasing world oil prices, so-called “Big Oil” acted rationally: It cut back on imports and stopped selling oil to independent service stations to keep its own franchisees supplied.
By May of 1973, five months before the embargo, 1,000 service stations had shut down for lack of fuel. By June, companies in many parts of the country began limiting the amount of gasoline motorists could purchase per stop.
This all led to the “Emergency Petroleum Allocation Act of 1973”, which made things worse. The act mandated that supply reductions had to be shared equally between branded and independent retailers. It also mandated a five percent supply set-aside to be allocated at the discretion of state governors, further tightening an already tight supply.
I bring all of this up because there’s a lesson to be learned.
On January 28, 1981, eight days after taking office, Ronald Reagan issued Executive Order number 12287, effectively rescinding the Emergency Petroleum Allocation Act of 1973. The next day, he issued Executive Order number 12288, putting the final nail in the coffin on Nixon’s wage and price controls. Almost immediately, gasoline shortages ended and we’ve had plenty of gasoline since. And yes, today’s price is high. But adjusted for inflation, it’s only just now reaching the levels it did at its peak in the 1970s.
What’s the lesson? Keep the government out of markets. Government intervention in the free flow of goods and capital will make things worse every time.
The best way to get rid of high prices is to have high prices. The market will react by reducing demand, putting downward pressure on the price. That’s happening right now and you’ll see the effect in the weeks and months to come.
I say all of this as a warning in this election year. Listen to the candidates, and yes I mean most particularly Clinton and Obama, and they’re saying that they are going to mount some government initiative to reduce gasoline prices and, oh by the way, solve the “mortgage crisis.”
Be very afraid.
I’ve said it before. Just like with gasoline, if you let the government start interfering with the free-market decisions of lenders, you’ll see credit totally dry up. Then we’re in real trouble.
The U.S. government ran World War II and the Apollo program very well. Give it credit. Now, name something besides those two.
The market will resolve high gasoline prices and the mortgage market mess. Let it do so and don’t listen to the pandering of the candidates.
That’s my word. What’s yours?