Unless we’d like to repeat that era, we ought to keep its price controls firmly in the rearview mirror.
Unless we’d like to repeat that era, we ought to keep its price controls firmly in the rearview mirror.
W ith gas prices at near-record highs and whispers of summer diesel shortages in the air, now is as good a time as ever to revisit the oil shocks of the 1970s. Almost half a century on, we’re tempted to chuckle at the photographs of supersized cars curled around the block waiting to fill up. Sometimes we can even spot a bell-bottomed man pushing a lawnmower or a stray child with a Dorothy Hamill haircut, gas can in hand. For the people in those lines, though, the wait wasn’t merely an inconvenience; it was frightening. A bedrock good that people took for granted was suddenly a whole lot harder to come by. Those of us who queued for toilet paper two years ago can certainly relate. But while we know what caused the Great TP Run of 2020, can we say the same for the ignominious images of consumer desperation in the 1970s?
According to the received wisdom, it was simply a matter of cause and effect. Writing in 2021 after the Colonial pipeline hack, the Washington Post’s Reis Thebault explained, “This was the 1970s, an age of 12 miles per gallon and decidedly low-tech fuel shortage culprits: geopolitics, OPEC, the Iranian Revolution.” Similarly, in the aftermath of 2012’s Hurricane Sandy, NPR’s Greg Myre wrote, “Americans from coast to coast faced persistent gas shortages as the Organization of Petroleum Exporting Countries, or OPEC, flexed its muscles and disrupted oil supplies.” Historian Meg Jacobs draws the same arc with her 2016 offering Panic at the Pump: The Energy Crisis and the Transformation of American Politics in the 1970s.
This is the popular recollection of the 1970s oil shocks: All was well, and then, boom: Middle East oil exporters turned our lives upside down by cutting off supply. Twice.
But while this account captures the proximate causes of the 1973–1974 and 1979 gas lines, Thebault, Myre, and Jacobs underplay key elements in a much more tangled story.
Buckle up.
In 1971, more than two years before the Arab oil embargo, President Richard Nixon executed a political gambit that would help him secure the 1972 presidential election but that would also precipitate a decade of economic crisis. On August 15, Tricky Dick went live on national television and, via the powers granted to him by the Economic Stabilization Act of 1970, announced a freeze on all prices and wages in the United States and a suspension of the dollar’s convertibility into gold. Nixon scheduled the comprehensive, economy-wide price-and-wage edict to last for 90 days.
According to the Cato Institute’s Gene Healy, Nixon’s maneuver — ostensibly to curb what we would now consider modest inflation — was popular, drawing 75 percent approval. A 1972 Harris poll reported that respondents thought the price controls were doing “more good than harm” by a 30-point margin. Economists, on the other hand, were less than enthused. Milton Friedman opined in Newsweek, “I regret exceedingly that he decided to impose a 90-day freeze on prices and wages. That is one of those ‘very plausible schemes,’ to quote what Edmund Burke said in a different connection, ‘with very pleasing commencements, [that] have often shameful and lamentable conclusions.’” Disturbingly, the president apparently agreed. According to Friedman, Nixon described the policy as a “monstrosity” in a private meeting with the economist and promised to do away with it as soon as possible.
But Nixon’s 90-day promise was not to be kept. Time and again, his administration extended the policy, if sometimes in altered fashion, over domestic crude oil and petroleum products. A year before the nation knew what OPEC stood for, downstream oil wholesale and retail markets were tight at best and short at worst. Politics took over, and the controls stayed on crude oil at the wellhead and all sales downstream to the consumer. Thanks to the price controls, fuel scarcity had already become a pressing matter by early 1973. In his opening statement at a congressional hearing, Scoop Jackson put the issue starkly:
The committee’s hearings and investigation to date have made clear that:
One, there has been an unprecedented breakdown in our energy supply and distribution system;
Two, the fuel shortages now being experienced are far more extensive than anticipated;
Three, more severe shortages of fuels, particularly gasoline, are in the offing.
Despite the growing problem, the administration extended the policy again in August of ’73. Eight weeks later the energy crisis would detonate on American motorists.
On October 6, 1973, Egypt and Syria launched a joint attack on Israel, prompting Nixon and Congress to give the Israelis $2.2 billion in military aid. Taking umbrage, Arab OPEC states coordinated a price hike against the U.S., cut production, and then embargoed sales altogether in an effort to weaken the U.S.–Israel bond, instigating a quadrupling of the global oil price.
At that point, as the popular account holds, the gas-line cataclysm began. Importantly, though, it was in the context of a political fiat making an adroit market response impossible.
In November 1973, Nixon signed the Emergency Petroleum Allocation Act, imposing new price ceilings on various types of domestic crude oil and refined products, guaranteeing that the fuel shortages would intensify into 1974. The administration’s subsequent erratic decisions were too convoluted (and too ineffective) to merit a complete recounting here. The key point is that Nixon’s price controls set the stage for the “shameful and lamentable conclusions” of which Friedman warned.
With the embargo lifted in March 1974 and Nixon out of the White House shortly thereafter, President Gerald Ford sought to remove the controls but was held back by Congress. Though the global oil price held relatively stable thereafter, albeit at a higher equilibrium, the price-control system was still partially in place into the Jimmy Carter presidency. The market was thus primed again for disruption when Iranians revolted in 1978, leading to the flight of the Shah in early 1979. Amid the chaos, Iranian crude output dropped by almost 5 million barrels per day, or 7 percent of global production at the time. Though Saudi Arabia made up for part of that gap by increasing its production, the U.S. was again plagued by gasoline scarcity.
On May 5, 1979, the New York Times reported lines as long as 60 cars at a Mobil station. Researchers H. E. Frech and William Lee later estimated that time spent in queues added the equivalent of more than 50 percent to the price at the pump in 1974 and roughly 33 percent in 1979. Anecdotally, energy historian Robert Bradley Jr. recalls want ads in the Houston Chronicle for “gas jockeys” who would man the lines in exchange for pay.
Mercifully, and against the wishes of Democrats in Congress, Jimmy Carter began the liberalization process in earnest by phasing out the price controls on oil and petroleum products in June 1979, a process that was then accelerated by his successor, Ronald Reagan. While Thebault, Myre, and Jacobs steer clear of this history, Bradley’s encyclopedic Oil, Gas, and Government: The U.S. Experience documents the crises’ every twist and turn. Though the Arab embargo and Iranian revolution were the proximate causes of the shocks, the enduring nature of the 1970s energy crisis was of our own making.
None of this should be interpreted as an assertion that the market prevents all shortages. Exogenous shocks will occur, but periods of acute scarcity will tend to be brief when the market is left to its own devices and prices can move accordingly.
When the oil shocks hit in 1973 and 1979, conversely, the market for crude and refined products was anything but free, and Americans paid a dear high price for that in the form of hours on end in lines. Without the extensive and complex control regime in place, higher prices could have enticed more product to the market from established domestic companies that were subject to the price ceiling, smoothing the consumer experience. In The Economics and Politics of Oil Price Regulation, Joseph Kalt estimates that price controls cost the U.S. upwards of 1 million barrels per day of crude-oil production during the crisis, directly constraining supply rather than relieving economic stress.
As Friedman and his wife and co-author Rose wrote in their 1979 tome, Free to Choose, economists may not know much, but they know very well how to cause a shortage: Cap prices below the market rate.
Today, this history may seem abstruse, but it is more relevant than it should be, with price controls again gaining political momentum. In the House of Representatives, a bill dubbed the Consumer Fuel Price Gouging Prevention Act passed by a margin of 217–207 on May 19. In the Senate, Elizabeth Warren has introduced an even more sweeping bill. Senator Sheldon Whitehouse of Rhode Island, ever eager to hit out at energy producers, has joined in. “We need to stop the kind of price gouging we’ve seen from Big Oil and other corporate bad actors during this global health crisis, and help Americans afford groceries and transportation. I’m glad to join @SenWarren in offering the Price Gouging Prevention Act of 2022,” he wrote on Twitter.
As in the Nixon era, economists are not so keen. “If passed and enforced vigorously,” economist Alan Cole wrote of the Warren bill, “it would wreck the economy.”
Unless we’d like to repeat the 1970s, we ought to keep that era’s price controls firmly in the rearview mirror.