Oil Shortages and Government Intervention

(Ray Harvey -- author of the excellent new book "Leave Us Alone" -- has graciously contributed the following post. Be sure to click the "Read more" link and take it all in. Careful though, you might actually learn something! --Bob Gronlund)

Early in the 1970's, the Organization of Petroleum Exporting Countries (OPEC) -- which includes Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela -- imposed an oil embargo upon the United States. This precipitated a sharp decrease in U.S. oil supply.

Not to be outdone in terms of sheer hubris and stupidity, the American government got started at about that same time on its steady barrage of environmental regulations, all of which conspired to further reduce the domestic supply of oil and gas.

For example, the vast reserves of oil on the outer continental shelf off the coast of California were put off-limits to drilling for fear of oil spills that would despoil the coastline. In addition, a great deal of the land owned by federal government -- a substantial amount, since the government owns more than half of all the land west of the Mississippi River -- was placed off-limits to oil exploration for environmental reasons. Meanwhile, the hundreds of new regulations that had been imposed on oil refineries made it much more costly, if not unprofitable altogether to build them (Dr. Thomas Dilorenzo, How Capitalism Saved America).

Adding insult to injury, then, in 1971, the Nixon administration imposed wage and price controls across a multitude of private industries -- nominally to (in their words) "control inflation." In actuality, though, these controls were meant to bolster support for the 1972 elections. They were from the beginning only meant to be temporary controls, and thus, in 1974, they were mercifully done away with -- all, that is, except the most important: petroleum.

Because of the rapidly growing U.S. population, the demand for oil and gas had dramatically increased, which, in collaboration with the regulation-mandated supply restrictions, as well as the price controls, created massive oil and gas shortages. Holding prices below (free)market levels, you see, stimulated consumer demand artificially; simultaneously, it made it less profitable to increase supply: a deadly combination, the end result of which could not have turned out any other way.

These shortages created miles-long lines at gas stations across the country, for all the world to see.

Amazingly, however, only a handful of folks were smart enough to connect the obvious dots: government intervention created the problem in the first place, and government had no business getting involved in private affairs anyway.

Of course, the government responded with its usual half-assed "conservation" regulations, which is a little like spitting on a wildfire in order to put the fire out. California even imposed another of its famously fatuous laws, this one being that you could only purchase gas on certain days if your license plate ended with an even number, and on other days if the plate ended with an odd number.

It goes without saying that all this would never have happened if there had been no price controls and no wage controls to begin with.

But it gets worse:

When OPEC began its embargo, driving up the price of oil, domestic oil producers would have had extra incentives to introduce more supply onto the market. At the same time, the higher prices would have signaled consumers that it was prudent to conserve more. A new market equilibrium would have been reached without any shortages or misallocations, and the OPEC cartel would have been broken, as it eventually was, by increased domestic supplies brought on by free-market prices (Ibid).

But letting the free market be free is not in the nature of power-hungry bureaucrats. Thus, the federal government created a new bureaucracy called the Federal Energy Administration, which later became the Department of Energy (DOE), deplorably still with us today.

The DOE forthwith proceeded to institute a whole new line of preposterous price controls and allocation rules, "so that the U.S. energy industry soon rivaled any of the Soviet Union's centrally planned industries in its complexity -- and inefficiency. The head of the new energy department was even given a Russian-sounding title by the media: energy czar."

But in the words of William E. Simon, our country's first energy czar:

As for the the centralized allocation process itself, the kindest thing I can say about it is that it was a disaster. Even with a stack of sensible-sounding plans for even-handed allocation all over the country, the system kept falling apart, and chunks of the populace suddenly found themselves without gas. There was no logic to the pattern of failures. In Palm Beach suddenly there was no gas, while 10 miles away gas was plentiful. Parts of New Jersey suddenly went dry, while other parts of New Jersey were well supplied. Every day, in different part of the country, people waited in line for gasoline for two, three, and four hours. The normal market distribution system is so complex, yet so smooth that no government mechanism could simulate it (William E. Simon, A Time for Reflection, 1978).

Everybody reading this who supports Barack Obama and his extreme socialist policies because it makes you feel less guilty about yourself to throw in with "a minority" -- without any reference whatsoever to that minority's so-called political-economic ideas -- please hear that.

And please hear this as well:

As the shortages became more erratic and unpredictable, people began to "top off" their tanks. Instead of waiting, as is customary, to refill the tank when it is about one quarter full, all over the country people started buying 50 cents' worth of gas, a dollar's worth of gas, using every opportunity to keep their tanks full at all times. And the fiercely compounded the shortages and expanded the queues. The psychology of hysteria took over. Essentially the allocation plan had failed because there had been a ludicrous reliance on a little legion of government lawyers, who drafted regulations in indecipherable language, and bureaucratic technocrats, who imagined that they could simulate the complex free-market processes by pushing computer buttons. In fact, they couldn't (Ibid).

No. They couldn't. They couldn't then, and they still can't now.

No army imaginable, even one composed of the most brilliant, super-genius planners that ever was, could plan even the most rudimentary aspect of a complex economy.

Only the free market can regulate itself.