Gas Prices: Don't Blame the Oil Companies or the Government

As everyone undoubtedly has noticed, gas prices are again shooting up. And when something bad happens, it's human nature to look for someone to blame. With gas prices that someone is always the big oil companies and/or the government. That is wrong.

Texas Tea

Gas prices are overwhelmingly determined by the world price of crude oil [look at the chart to see how closely they track] and neither the companies nor the government controls that. Such wasn't always the case. In the 50s and 60s the US set the world oil price, and kept it at about $3 per barrel in current prices. We had that power because the US was not only the world's biggest oil producer but also had excess capacity, so that  production could be adjusted up or down to hold the price steady. (The group that actually set production levels was called, strangely, the Texas Railroad Commission.)

The situation changed dramatically in the 1970s, after the 1973 Arab-Israeli War. By then the OPEC countries - mostly Arab - dominated world oil production and were angry at the Western countries who supported Israel. After briefly embargoing oil exports, OPEC quadrupled its price for crude, from $3 a barrel to $12.

The Energy Crisis

The world was still adjusting to the 1973 price shock when the 1979 Iranian revolution almost halted oil output in that major producing country--and the already-high oil price more than doubled. In "real" (i.e., inflation-adjusted) terms the price of crude in 1980 was about five times higher than in 1973!

People who remember 1974-1980 will also surely remember long lines of cars waiting at gas stations. That was entirely government's fault--first Nixon, then Carter-- proving that both parties can be equally incompetent on economic policy. With assorted controls of prices, odd/even day rationing, purchase limits. and rules on gas allocations, government prevented the free market from working and thereby caused the gas lines--which did not occur in most countries.

The Unexpected

But then something unexpected happened-oil prices started to fall. Economists (and everyone else) had underestimated the impact of high prices on supply and demand. It took years to play out, but the huge price increase caused a surge in oil exploration and production, and caused oil product users to find ways to cut back. Oil and gas prices fell through most of the 1980s, before leveling off. Indeed, from roughly 1987 to 2002, the real price of gas was actually below its 1973 level.

Next week: What changed after 2000 (Partial answer: China)

(The author is a retired CIA economist who played a small role in the Agency's analysis of the 1973 oil price hikes. He lives in Mason Neck)

Editor's Note: Find prices on gas in Lorton with our Traffic and Gas tab.