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Puppet State Brought Down By Price Controls?

12/31/2005Llewellyn H. Rockwell Jr.

If you read the financial press, and are watching Iraq news, the warnings are quite ominous.

Writes the LATimes: "Iraq's government has sharply raised the price of fuel and other petroleum products this month, sparking discontent and protests and worrying international observers who say the increases could hurt millions of poor Iraqis and throw the country into further turmoil."

Says the Guardian via AP: " Long lines formed at gas stations in Baghdad on Friday as word spread that Iraq's largest oil refinery had shut down in the face of threats against truck drivers, and fears grew of a gas shortage."

Says Reuters: "Falling oil exports and fuel shortages, especially of gasoline, have raised the level of popular frustration with successive Iraqi governments since Saddam's rule. Iraqis queuing at gasoline stations in Baghdad said they feared the Baiji closure would make their lives even more miserable."

And get this: Iraq's on-the-books oil exports are at their lowest level in two years. No oil leaving and no oil coming in – at least on the books. This is the stuff of which genuine revolutions are made.

Remarkable isn't it? What the rebels, insurgents, and terrorists have yet to accomplish – the end of US puppet rule in Iraq – may yet be accomplished by bad energy policy. And this policy was not only imposed after the US invasion but has been continued in the years since, leading to an ever-worse catastrophe.

The mystery to explain is why a country that is incredibly oil rich – with the 2nd largest oil reserves in the world – would face a massive shortage of all oil products. If you knew nothing more than this detail, and you knew something about the history of economic debacles, you might guess: price controls. You would be right.

From what I can gather from public sources, the government assumes ownership of all oil in the country. That hardly makes the Iraqi situation unique in the region, but what is unique is the combination of subsidies and price controls that led gasoline to be fix-priced at 5 cents per gallon until very recently.

You don't have to be an economist to know what the results of this policy would be. Not only does it lead to overconsumption. The number of vendors willing to distribute the stuff in the open market collapses. What’s left is bought in Iraq and sold to neighboring countries at a profit.

Thus does a policy designed to make oil cheap for all result in the bizarre world in which a country full of oil underground would not have any of the stuff available above ground.

Actually, you can try this trick with any product. Price sugar, eggs, socks, or harddrives with a price ceiling of 5 cents and see what happens. Enforce the rule with vigor and you will empty the shelves and clean out the country – at least in the above-board economy. The smarties will be making money through smuggling and arbitrage outside the law zone. The rest of the population will have to do without.

The shortage problem was obvious at this time last year, when The Economist reported that drivers were waiting in lines up to 24 hours for gasoline. It got to the point where Iraq was having to import oil! Finally realizing that affairs had gone very wrong, the Iraqi government decided to do something about it.

The something that it should do is sell the wells and refineries and distribution centers to anyone who will buy them. Eliminate subsidies. Eliminate price controls. That would drive the price to regional standards with no gas lines and only minor grumbling among consumers.

Instead, the government put another US-linked member of the elite in charge of the oil ministry, and promptly boosted the price to 65c, and set it to rise to $1.00 on the government's own schedule. But that does not alleviate shortages, for even a spread of a few cents between black market prices and official prices can keep smuggling alive.

It might end lines, not by satisfying happy consumers but by discouraging away anyone not prepared to pay the government-set higher prices.

None of this addresses the major security problem. The pipelines keep getting blown up. The state can't protect them. They are another obvious candidate for privatization. Let private dollars pay for the protection of private property.

And yet there is the major overarching problem that any kind of privatization will be seen as an imperial venture. It can only give both the US and the capitalist system a bad name. If reform is going to come, it can only come from within.

Sadly that leaves no real answer to the problem immediately facing Iraqis. The only option for the US is not to continue economic and political control in any form, but to immediately pull out. That would be a surprise winter gift that the US could give all Iraqi people.

If the US doesn't leave now, it could be forced to leave later. Never underestimate the effects of bad economic policy. It could be the very thing that finally brings down a failed attempt to control a country through imperial means.


Contact Llewellyn H. Rockwell Jr.

Llewellyn H. Rockwell, Jr., is founder and chairman of the Mises Institute in Auburn, Alabama, and editor of LewRockwell.com.