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Nonsense on Oil

Mises Daily: Thursday, March 16, 2000 by


Recently our campus has been hit with a silly e-mail calling for a "gas out." Well, not being able to let such ignorance of economics to remain, I wrote a reply that was very well received. However, a religion professor wrote back saying that he agreed the boycott may not work, but of course, we need price controls.

I couldn't resist a good argument.

1st E-mail:

Last year on April 30,1999, a gas out was staged across America to bring the price of gas down, and it worked. It's time to do something about it again. Only this time lets make it for three days instead of just one.

The so-called oil cartel decided to slow production to drive up gasoline prices. Lets see how many American people we can get to ban together for a three day period in April, NOT TO BUY ANY GASOLINE, during those three days.

LET'S HAVE A GAS OUT. Do not buy any gasoline from APRIL 7, 2000, THROUGH APRIL 9, 2000. Buy what you need before the dates listed above, or after, but try not to buy any during the GAS OUT.

If you want to help, just send this to everyone you know and ask them to do the same.

We brought the prices down once before, and we can do it again.

Come on America let's stand together.

We CAN MAKE A DIFFERENCE !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

My Response:

Dr. M.,

I hope that you have sent this as an example of what non-economists shouldn't do. Such an action would be pure folly. Why would one think that a few people doing this one time last year caused prices to be low last summer? Such reasoning is a clear example of the post hoc ergo propter hoc fallacy.

Coincidence does not imply causation.

By what economic theory would this action supposedly work? Well, a decrease in demand would be a leftward shift in the demand curve and both price and quantity would fall, but this result is not sustainable. The underlying real demand has not changed (the protesters will eventually use their cars again), and the oil companies know it. So what is the oil companies' motive to lower the price for an entire summer?

Additionally, if the price of gas really was that sensitive, then the gas price would spike the day before the protest. Why? Two reasons: 1) there's an increase in demand; and 2) if the "gas out" is advertised the oil companies would be aware of the protesters' intent. (If I were an oil company and I saw a bunch of disgruntled people attempt to boycott my product, but before they do, they're going to fill up their tanks, then I'd gouge 'em!)

However, suppose that you are able to convince people to not buy gas for those three days. Further suppose that for those three days the price of gas falls. On that day, I think I'll be buying gas before it goes up a day or two latter. So the result is that the protesters end up paying a high price and not have gas for three days. Those who don't go along with this scheme benefit.

In North Carolina the state tax on gas is over 22 cents a gallon and the Federal tax is over 18 cents. Together it's over 41 cents a gallon!--about a third of the price. I've noticed that people tend to get upset with increases in prices they see everyday, like gas prices or ATM fees, but rarely do they get upset with the high level of income tax. Is it because they don't see it everyday?

If one was really serious about organizing to lower gas prices, we should argue for a cut in (or preferably the elimination of) the gas tax. Or even better, a general reduction in income taxes across the board would lead to the decrease in the cost of gas relative to one's overall budget.

Finally, we should remind ourselves that Iraq has not supplied oil to the world since they invaded Kuwait. If it were not for Clinton's wonderful ability to deal with Iraq, they would have been exporting oil and driving the price lower since the early '90s.

So, yes we can make a difference by making our views heard, not by protesting oil companies, but by telling the real culprit (government) to stop intervening in the market.

Paul Cwik
Dept. of Econ.

2nd E-mail:

I agree with you that a boycott might not work. However, I think situations like the sudden rise in gas prices certainly creates validity in the argument that there should be government controls on prices of needed commodities like gasoline. Giant corporations need to be controlled from taking advantage of people during times of shortage.

Dr. J
Department of Religion

My 2nd Response:

Dr. J.,

I am pleased to see that you have considered the argument against a boycott, and so I hope that this response will receive the same level of open-mindedness.

Prices are little packets of information, signals if you will, to entrepreneurs. They tell the entrepreneur how to adjust resources in their production process so they can act in the most efficient manner possible (meaning: production with the least amount of waste). Prices are formed by everyone making decisions (based on their own subjective preferences) to buy or not to buy.

This system may not be perfect, but it does have significant advantages over any other system, especially with regard to minimizing waste and maximizing happiness. Entrepreneurs use prices to coordinate the economy. Those who are good at removing misallocations (maladjustments) in the economy are rewarded with profits. Those who are poor at translating the consumers' signals suffer losses. If enough losses pile up, they then go out of business and have to go to work for someone else. The best at coordinating the economy stay in, and those who cannot have to go to work for someone who can.

When a government decides, in its own arrogance, that a price is too high or too low, it is replacing the combined valuations of the populace (the will of the people) with its own. As a result a permanent misallocation emerges.

The result of a price ceiling is a permanent shortage (e.g., the gas lines in the 1970s.) If the price is allowed to rise (e.g., during the Gulf War) we do not see lines. Lines are a non-pecuniary means to resource allocation and is necessarily less efficient (more wasteful).

A shortage can only be caused be an incorrect price. If the market is allowed to transmit the correct signal (read: equilibrium price), then the quantity supplied exactly equals the quantity demanded.

If you are still doubtful consider the impact of a hurricane. When a hurricane is approaching, we see people running out to the store to buy plywood for their windows. When this happens, we see prices go up. Non-economists call this "gouging" and a bad thing. Unfortunately, this belief is exactly wrong.

What is actually occurring is the higher price signals to entrepreneurs that this resource is desperately needed. It encourages them to reallocate those resources to the areas in need. All of this happens without the need of any central planner. The entrepreneurs are able to correctly gage the intensity of the need and deliver the correct amount of supplies (without short changing other areas).

A government planner who imposed price controls would stop that signal. Without that signal, the resources wouldn't move into that needy area freely. In other words, only by the use of coercion could these resources by moved into that area. Why say "coercion"? Well, just try and not pay your taxes!

More importantly, however, is the knowledge that doesn't exist with the bureaucrat. In other words, without the price signal, how much plywood and water, etc., should be shipped to the needy region? Without prices, there is no way to know.

So I respectfully and completely disagree with the notion of imposing any sort of price controls or restrictions on businesses even during times of crisis.

Paul Cwik
Dept. of Econ.


Paul Cwik teaches economics at Campbell University. You can email him at Cwik@mailcenter.campbell.edu.