Are gasoline shortages and lines at the pump just around the corner? Some say it’s 1973 all over again. Or is it?
• Yes, we have unrest in the Middle East and oil prices are rising.
• No, we don’t have the insane set of price and allocation controls that led to the shortages and gas lines of the 1970s (at least not yet).
• Yes, the soothsayers’ crystal balls foretell the imminent depletion of the world’s oil reserves, just like in 1973.
• No, in terms of energy use per real dollar of GDP, our economy is about 30 percent more efficient than in the 1970s.
• Yes, many foreign oil producers don’t seem to like us.
• No, our major suppliers now are Canada and Mexico, who get along with us just fine.
Though high oil prices are not good for the economy, not every spike portends disaster. There have been at least four trough-to-peak increases of $15 per barrel in just the past two years. Last week’s $100 price was within $10 of the last May’s price.
For now, there is enough spare production capacity to make up for lost Libyan production. Of course, if the unrest spreads to major oil producers and leads to significant and persistent production cuts in those countries, price could rise well above $100. But even then, it need not be 1973 redux.
What those of us old enough to have been around in 1973 remember most from that energy crisis was the shortages and gas lines. What those old enough to have been around for the significant disruption to oil markets in 1990-1991 don’t remember is shortages and gas lines -- because there weren’t any.
It is an established economic truth that when prices are capped below the level that brings supply and demand into balance, there will be shortages. In 1973 we had the general price ceilings of the Nixon-era wage and price controls. The ceilings on petroleum products were extended when the general price controls lapsed.
And while shortages of other goods evaporated, the gasoline shortages and gas lines persisted, with varying intensity, until -- miracle of miracles -- those price controls were lifted as well. Immediately the gas lines disappeared.
There were other controls that also ended at the same time -- odd-even sale days in many states (which did nothing but irritate people), a Byzantine system of petroleum allocation rules, and cross subsidies to imported oil. But it was the price ceilings that caused the shortages and gas lines.
Though we don’t have federal price ceilings (some states have trigger mechanisms that can bring them into play), we also don’t have a set of policies that encourage the oil production that can moderate prices whether there is a crisis or not.
For instance, it would be a good idea to fast-track the Keystone XL pipeline, which would add an additional 1 million barrels per day of Canadian oil to our markets. We also should allow drilling on the fraction of 1 percent of the Arctic National Wildlife Refuge, which may give access to 10 billion barrels of petroleum.
It would be a good thing if the recent permit given to Noble Energy signals the return to developing our offshore resources, instead of just forfeiting that market to foreign producers. It would be a bad thing for gasoline prices if we raise taxes on oil companies just because they make a profit, and another bad thing to continue closing off access to promising onshore oil development.
So, with our current policies we won’t see shortages and gas lines so emblematic of the 1970s. However, if we throttle exploration and development, we will see higher gasoline prices than we otherwise would.
David Kreutzer, Ph.D., is the Research Fellow in Energy Economics and Climate Change at The Heritage Foundation.