Keep the government’s
hands off oil
Because of Katrina we are in for some difficult times in the months
ahead in the energy field no matter whether it is in the form of gasoline, oil,
natural gas, or electricity.
If the federal government, or the various states, bow to public
pressure to take hold of the pricing and distribution of energy, it will only
make matters much worse.
The core of the problem is that we now have a highly disrupted
processing and delivery system in the Gulf of Mexico and onshore in Louisiana and its
The Gulf accounts for one third of U.S. crude oil production and
Katrina has shut down 90 percent of it. In
addition, natural gas representing 15 percent of total U.S. consumption is cut off.
The release of oil from the Strategic Oil Reserve will ameliorate
the shortage somewhat. However, Katrina wiped out enough of the nation’s
refining capacity to reduce by 10 percent the amount of gasoline we normally process
and use. And the nation’s gasoline inventories were already at very low levels.
This capacity was already very tight to begin with since there have
been no new refineries built in the U.S. since 1975.
All of which tells us that there are going to be significant price
fluctuations and distribution problems until the industry settle down to this
new, but assumedly temporary situation.
But first, class, an economics lesson on “shortages.”
Barring short-term catastrophes, of which Katrina is a perfect
example, shortages do not occur in free market systems. If we have shortages,
it is because the demand exceeds the supply and that only occurs when prices
are lower than market, a situation normally caused by government price capping.
Otherwise, when suppliers even sense that future demand is likely to
exceed supply, they raise prices to dampen demand — and maximize profits. In
turn, these higher prices stimulate suppliers to increase supply by using methods
that were formerly uneconomic.
Thus the dampened demand and the increase in supply leads to a new
balance between the two.
Some believe that it was shortages of oil and gasoline that caused
the long lines and distribution problems of the 1970s.
However, the primary cause of the gas lines was the allocation
program and gasoline price controls required by the 1973 Emergency Petroleum
Allocation Act. The energy czar of the time supervising the federal program, William
E. Simon, later said
“The normal distribution system is so complex, yet so smooth that no
government mechanism could simulate it. All we were actually doing was damaging
the existent distribution system. The kindest thing I can say about the
allocation process is that it was a disaster.”
He added that other elements of the program not only increased
"Disincentives for crude oil exploration and production," but it
also meant "The economy was shielded from price hikes, stimulating
The cumbersome allocation process, together with price controls,
which had already held down domestic production, led to spot shortages
throughout the country. Lines formed at gas stations and every day people
waited in line for hours in one place although in neighboring counties gasoline
might be plentiful. Frustrated
and frightened, consumers believed that we were 'running out of oil' and that
all the warnings of the Club of Rome and others were coming true.
We learned our lesson back in the 1970s let us hope that our
nation’s leaders have more sense than our Hawaii elected officials and leave
price caps alone.
Earlier this year the official U.S. forecast for 2006 oil prices
was $30 a barrel. There is no long-term rationale for $70 a barrel, as there is
no rationale for long-term gasoline prices at their present level.
All we have to do is let the market get beyond the present near
panic, let the repair work begin and wait for matters to work themselves out.
Cliff Slater is a regular
columnist whose footnoted columns are at: www.lava.net/cslater
 later became
Secretary of the Treasury