Gas: The problem with price controls

Here we go again. With gas prices going up it didn’t take long for many of my lefty friends to start calling for price controls. We can’t let those greedy oil companies make all this money while consumers suffer, they cry. The biggest problem with this “problem solver” is that it is not one at all, and will in fact worsen the situation. Thomas Sowell describes why this is in his article, An Ancient Fallacy: Price Controls.

An important thing that my friends don’t realize is why the prices have gone up in the first place. Supply and demand are the two things that dictate prices in a free-market economy. World consumption of oil continues to grow, raising the demand side of it. On top of that supply has been more restricted, with an unstable Middle East and a shortage of oil refineries here in the United States. Due to these factors, it really isn’t that strange that the cost to fill our tanks is rising. The question asked by Sterling T. Terrell from the Mises Institute is, why are gas prices not higher? As he explains in his article, when gas prices are adjusted for inflation, they are not that much higher than they were in the 1950’s. He also points out that there are industries that have an even higher profit margin than oil companies, including the water utility industry! Why aren’t those CEO’s on trial for price gouging?

So, knowing that supply and demand dictate prices, lets look at what prices are in the first place. Prices are indicators that signal how much of a product to supply. This is how a free-market economy escapes shortages that often exist in an economy controlled by government planners. The consequences of price contols put in place during the oil crisis of the 70’s is an example of what can happen. Long lines at the pump and the inability to buy gasoline on certain days were results of artificially lowering the price of oil. When prices go down, supply goes down. Vice versa, when prices go up, supply goes up. This is how we stop a shortage from happening again here in the U.S. So unless you want to wait for hours to fill your gas tank, leave the prices to the market.