Some of the dire consequences of oil price controls

Because the price control system was incomplete and did not cover every part of the US oil market, price controls were rarely binding. When it did, in the winter of 1972–1973, the winter of 1973–1974, and early 1979, shortages arose. For the remainder of the decade, the price control and duty program functioned primarily as a tax and transfer system. Economist Joseph Kalt found that between 1974 and 1980, federal oil price controls (mainly through the old oil tariff program) transferred $43 billion to $153 billion annually (in 2023 dollars) from domestic crude oil producers to refiners. Because this reduced the marginal cost of producing refined products, part of the transfer lowered product prices and benefited consumers. Kalt estimated that 60 percent of the transfer remained with the refineries and 40 percent was passed on to customers.

The price controls and incentive to import created by the duties program reduced domestic production by 0.3 to 1.4 million barrels per day. And the welfare losses of crude oil producers exceeded the gains of refiners and crude oil consumers. The difference between the two figures is the economic value that price controls destroy – what economists call “deadweight loss” – which Kalt estimated at between $3 billion and $15 billion per year (in 2023 dollars) between 1975 and 1980.

Kalt’s analysis assumed that world oil prices were unaffected by U.S. controls. But economist Rodney T. Smith calculated that the EPCA price controls increased world crude oil prices by 13.35 percent. And economist Robert Rogers, who incorporated Smith’s findings into an econometric model, found that the EPCA increased domestic oil prices.

This is an excerpt from one of my favorite articles in Ryan A. Bourne, The War on Prices: How Popular Misconceptions About Inflation, Prices, and Value Create Bad Policy.

It’s Peter Van Doren, ‘Oil and Natural Gas Price Controls in the 1970s: Shortages and Redistribution.’

I remember in December 1974 and early 1975 trying to figure out how the “entitlement” program would affect prices. I shared thoughts with Richard Sweeney and Tom Willett of the US Treasury Department. I had met them both in the summer of 1973, when I was a summer intern at the Council of Economic Advisers. The person who finally found out was my fellow UCLA student Joe Kalt.

I titled this post “Some of the Terrible Consequences of Oil Price Controls” because the worst long-term consequences were: CAFE mandates on car and truck fuel economy are the most important.