Because the price control system was incomplete in that it did not cover all segments of the U.S. oil market, price controls were rarely binding. When they were, in the winter of 1972-1973, the winter of 1973-1974 and early 1979, shortages occurred. For the remainder of the ten years, the price and tariff controls program acted primarily as a system of taxes and transfers. Economist Joseph Kalt found that from 1974 to 1980, federal control of oil prices (primarily through the old oil entitlement program) transferred between $43 billion and $153 billion per year (in 2023 dollars ) from domestic crude producers to refiners. Because this lowered the marginal cost of producing refined products, part of the transfer reduced product prices and benefited consumers. Kalt estimated that 60 percent of the transfer remained with refiners and 40 percent was passed on to customers.
Price controls and the import incentive created by the tariff program reduced domestic production by 0.3 to 1.4 million barrels per day. And the wealth losses of crude oil producers have exceeded the gains achieved by refineries and crude oil consumers. The difference between the two figures is the economic value that price controls destroy – what economists call the “deadweight loss” – which Kalt estimates at between $3 billion and $15 billion per year (in 2023 dollars) from 1975 to 1980.
Kalt’s analysis assumed that global oil prices were unaffected by U.S. controls. But economist Rodney T. Smith calculated that EPCA’s 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.
This is Peter Van Doren, “Oil and Natural Gas Price Controls in the 1970s: Shortages and Redistribution.”
I remember trying to understand in December 1974 and early 1975 how the “duties” program would affect prices. I shared my thoughts with Richard Sweeney and Tom Willett of the US Treasury. I became acquainted with both of them during the summer of 1973, when I was a summer intern at the Council of Economic Advisers. The person who finally figured it out was Joe Kalt, my fellow graduate student at UCLA.
I titled this article “Some of the Terrible Effects of Price Controls on Oil” because the worst effects occurred in the long run: CAFE’s mandates on fuel economy for cars and trucks being the main one .
