Should we institute a price freeze and Rationing for gas?

Question

Forget the 70s, this is an entirely different situation. There are war profiteers who are making vast amounts of profit. They promise to plow it back, but you know better. This is like WW11 when rationing was strict and war profiteers were put out of business. Furthermore, many noble americans sacrificed to aid the war effort. Mr Bush asked us to all spend. Then gave a humongous tax break for the wealthy. It will take a long time to develope a clean alternate source of fuel, meanwhile can't we show the same nobility of spirit? Ration by miles per gallon and limits on miles driven. Don't tell me Americans are too soft to sacrifice for the good of the nation. And please, leave the global economy out of things.

Answer 1

Steve - I apologize for my insulting tone and sarcasm in the first post. It was unnecessary and I apologize. I've modified my response and regret the original.
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It is difficult to discuss the impact of an oil supply policy without looking to the global economy simply because we depend too much on exports, as well as the international financial condition of our currency, in order to gain supply. But there are some effects that can be seen at a completely local level, so I'll address these.

You are right to say that this is a different situation than the 70's, however I believe we'd still see a similar result in the form of a shortage.

The gas crunch in the 70's was entirely supply-driven - OPEC cut us off. It was an intentional move, one we are not likely to see again since the reputation of the OPEC members was significantly damaged, and they also learned they were unable to trust one another in a cartel situation (Saudi Arabia being the member most likely to defect).

The current situation is demand-driven. Despite the more efficient American 'fleet' so to say, as compared to that of the 1970s, we have a significant increase in the number of drivers, number of miles driven, and number of vehicles per household without a sufficient increase in infrastructure to accomodate.

We are also experiencing a moderate supply crunch due to damage at facilities following Katrina, and a dearth of new construction for oil refineries (since such construction represents an intense capital expenditure with a long profit horizon).

There is also a global concern in the development of southeast Asian nations, particularly China. We're not the sole culprits, and we'll have to work twice as hard - sacrifice more, to borrow your argument - to compensate for our MFN's growth.

Thus the difference between the shortage of the 1970s and that of today is that previously it was supply that failed to live up to demand, while today demand outstrips supply.

A price freeze alone means supply would be curtailed further since a profit-driven company (and oil companies certainly are) will only produce to a point of maximum profitability, while exacerbating the number of gallons demanded. Thus the shortage would get worse as the 'gap' between supply and demand widens.

Thus it is wise to suggest a rationing plan, as this will prevent an overall increase in quantity demanded, although the policy would have to be carefully written to ensure people aren't 'choked off' from being able to get to their jobs.

One potential for enhancing a rationing plan's effectiveness would be to allow a 'market' for rationing points ("A" cards or what have you) so that those who are rationed more than they need (or otherwise can become more fuel efficient - buying smaller vehicles or changing driving habits) can sell their extra rations on the 'market'. A similar system is postulated to have existed unofficially during WWII - sort of a black market.

Such a system would probably be instituted with debit cards and online access, so that people could trade credits over the internet.

A similar market approach has been very successful in buying and selling pollution credits - since companies seek profit, when efficiency becomes a profit center, there will be a response.

I'd also be concerned about the feasibility of rationing. There's something about the very word that creates a behavioral shift - I'd worry about hoarding and the potential for a black market. Not that black markets are terrible in and off themselves (technically, eBay, flea markets and gun shows are black markets in a way, since laws regarding taxes and sales restrictions can be avoided somewhat effectively), but in something like oil which is both valuable and has a wide swath of buyers and sellers, I'd be afraid it'd become a source of strength for the mob. But this is just conjecture.

A successful plan should also foment a permanent change in behavior. I agree with the idea of sacrificing, but say it's time to take it a step further and create a permanent radical change in economic structure. By creating a reward for efficiency and frugality, we would avoid a number of panacaea.

Finally, I'd suggest we also remove speculators from the picture. I'm a fan of free markets (as noted above), but oil is just too valuable and scarce to allow anyone with an e-trade account to buy and sell it. I wouldn't allow speculation in petroleum futures any more than I'd allow speculation in, say, polio vaccine. I'd say the same thing for currency markets (where 80% to 90% of transactions are done by speculators), although it is so easy to get burned here that I don't think many speculators stay in long-term.

Lastly, I see from your profile that you do not support the President - I don't agree with all of the President's economic efforts, but this oil crunch is not his fault. Although his connections to oil companies are troubling, I think the media would find something to tackle him on - the high price of ethanol, for instance, if he held ties to ADM and ConAgra. Although I must admit I do agree that his support of further expenditures is troubling - at some time, we need to cut back. Perhaps the housing deflation is a good thing - tens of millions of homeowners must cut back in order to service their new debts.

Answer 2

Price freezes and rationing are very costly to administer and they don't solve the problem, but ensure its continuation. No one in their right mind would sell oil in the U.S. at low government-imposed prices when they can do it in Japan or Europe, where no price controls would exist. Taxation is a much easier way of getting it done. The higher the gasoline price, the greater percentage of it goes to taxes.

While you are speculating about whether Americans are too soft to sacrifice, consider the fact that the Europeans and the Japanese have been sacrificing for decades; their gasoline prices are two to three times higher than they are in the U.S., mainly due to very heavy taxation of gasoline.