Reply #4: Price controls are a bad idea in a market economy. [View All]

If the U.S. announced that it would no longer pay more than, say, $20/barrel for crude oil, but China was still willing to pay $60/barrel, every oil-exporting country would simply stop selling crude oil to us.

The alternative would be for the U.S. to still pay market prices for the crude, but offer subsidies so the price to U.S. refiners stayed the same. But the subsidies would come out of tax revenue, which would make our (already gargantuan) deficits even larger. Indonesia is now having riots because they finally had to reduce their fuel subsidies after the costs rose to one-third of the government's entire budget.

We could put price controls on non-imported petroleum, but then U.S. refiners would have tremendous incentive to use U.S. petroleum exclusively, which would cause us to rapidly deplete all of our remaining reserves. After that we would be forced to pay the (now higher) market price to import petroleum or else have no more petroleum at all.

Gasoline prices are a little trickier, because effectively all of our gasoline is refined in the U.S., regardless of whether the crude came from here or from overseas. The main risks with price controls on gasoline are two-fold:

1. Part of the price of gasoline is based on the cost of crude oil. If the price of crude goes up, but the retail price of gasoline is held constant, someone in the supply chain (refiners, distributors, or wholesalers) takes a loss. Enough losses and they will stop operating or go bankrupt. Subsidies would cause the same problem as above.

2. Price controls on gasoline will keep demand artificially high, which in the case of subsidies produces a snowballing of costs for taxpayers. Price controls without subsidies will lead to chronic shortages, as the incentive for private industry to invest in new production capacity will fall to zero. Of course, the government could get involved and start building and running refineries, gas stations, and whatnot, but now we're talking socialism and that's a whole different discussion.