Because the price control system was incomplete in that it did not cover all parts of the U.S. oil market, price controls were rarely binding. There were shortages in the winters of 1972-1973, 1973-1974, and early 1979. For the rest of the decade, price controls and entitlement programs functioned primarily like a tax and transfer system. Economist Joseph Kalt estimates that from 1974 to 1980, federal oil price controls (primarily through the Old Oil Rights Program) cost domestic crude oil producers to refiners between $43 billion and $153 billion annually (in 2023 dollars). ) funds were discovered to have been transferred. Because this lowered the marginal cost of producing refined products, some of the transfers lowered product prices and benefited consumers. Kalt estimated that 60% of the remittances remained with the refiner and 40% was passed on to customers.
Import incentives created by price controls and entitlement programs reduced domestic production by 30 to 1.4 million barrels per day. And the loss of wealth to oil producers exceeded the gains to refineries and oil consumers. The difference between the two numbers is the economic value that price controls destroy, or what economists call “deadweight loss,” which Mr. Kalt calls $3 billion a year from 1975 to 1980. estimated it to be between $15 billion (in 2023 dollars).
Kalt’s analysis assumed that global oil prices were unaffected by U.S. regulations. However, economist Rodney T. Smith estimated that EPCA’s price controls increased global oil prices by 13.35 percent. And economist Robert Rogers, who incorporated Smith’s findings into an econometric model, found that EPCA increased domestic oil prices.
This is an excerpt from one of my favorite articles by Ryan A. Vaughn. War on Prices: How Common Misconceptions About Inflation, Prices, and Values Create Bad Policy.
“Oil and Natural Gas Price Controls in the 1970s: Scarcity and Redistribution” by Peter Van Doren.
I remember trying to understand how the “entitlement” program would affect prices in December 1974 and early 1975. I shared the idea with Richard Sweeney and Tom Willett of the US Treasury. I met them in the summer of 1973, when I was a summer intern at the Council of Economic Advisers. It was my colleague Joe Kalt, his UCLA graduate student, who finally figured it out.
I titled this article “Some of the terrible effects of oil price regulation” because the worst effects were long-term. This is primarily a cafe mandate for the fuel efficiency of cars and trucks.
