At Large

Learn From America’s Mistakes

Here's a lesson for China: the gas lines of 1973 and 1979.

By 12.3.07

Any country pursuing economic liberalization could learn much from America's successes. But these days, China might learn more from America's failures.

In the booming southern coastal region of Guangdong, energy price controls have forced truckers to wait in long lines for diesel fuel. The Chinese government forces oil refiners to sell their products at prices well below what it costs to produce them, so the refiners have cut back production capacity, resulting in long waits at the pump. "Oil futures are near $100 [a barrel], but the price we sell at is only $60. We are still losing money," an executive of the Chinese energy company Sinopec told the Wall Street Journal last month.

For 17 months, PRC planners kept Chinese oil prices fixed, while the true market cost of oil skyrocketed. Now, thankfully, the government seems to have gotten the memo. At the beginning of November, the PRC raised fuel prices by roughly 10 percent, in hopes of ending the shortages. It helped, but only allowing prices to return to market levels will restore a healthy equilibrium of supply and demand.

The PRC's policies have precedents in America, and they're not pretty. In 1973, the oil crisis induced the U.S. government to pass oil price controls, which most Americans knew better as a system of gas lines. Then in 1979, the Iranian revolution disrupted world oil supply for the second time in a decade, creating another big spike in prices. U.S. President Jimmy Carter instituted price controls again, resulting, as before, in long lines at the gas station.

Drivers waited hours to fuel up their cars, often in lines hundreds of cars long. In the state of Maryland, governor Harry Hughes proposed an odd-even system of rationing, under which cars with odd-numbered license plates could gas up on odd days, and cars with even-numbered plates gassed up on even ones.

It was bizarre, and it sure wasn't popular.

And of course once the government gets started controlling prices and rationing scarce goods, it's hard to stop it. It didn't take PRC planners long to recognize that the price controls were hurting their own oil companies, but instead of allowing them to charge what the market would bear for the products, they tried to compensate the companies for the losses. And so the lunacy of the controls compounded itself.

"The government forces state-owned or state-controlled firms to absorb losses that analysts say are now running at up to $10 a barrel on imported crude," John Ruwitch wrote recently in the International Herald Tribune, so "for the past two years [the PRC has] also doled out hefty year-end compensation to Sinopec, the worst hit."

Sinopec controls about 80% of the Chinese market for refined petroleum products, and China Daily reports that in 2006, the bailouts cost the government more than $1.2 billion. So the PRC essentially forced consumers to pay for the inconvenience of waiting in lines.

The Chinese government knows how much it paid out to aid ailing firms, but it'll never really know how much harm it dealt the overall economy. In May 2006, the Chinese government allowed gasoline prices to go up by 10.6 percent, and diesel prices to go up 12.3 percent. No doubt governing bodies made those decisions on the basis of some economic analysis, but as anyone familiar with the laws of economics has to wonder, what did these economists know about demand that the consumers themselves didn't?

Spiking prices often aren't pleasant, but they're not the end of the world, either. As my colleagues Jerry Taylor and Peter Van Doren point out, in the last week of September 2003, oil was selling in U.S. spot markets for $23.86 a barrel. Four years later, oil prices are four times higher, but the inflation, unemployment, and recession that supposedly follow oil price shocks are nowhere to be seen.

China's Communist Party has staked its legitimacy on the ability to continue delivering economic growth at what, by historical standards, is a blistering pace. Party officials seeking to ameliorate popular discontent no doubt want to shield ordinary folks from spiking prices, but like them or not, market prices are a reality.

Allowing prices to rise and fall as they will in the market can actually relieve pressure on governments. Scarce goods are scarce goods, and even an all-powerful party can't control everything. By recognizing certain adversities as facts of life, a government can absolve itself of the onus of having to put an end to them. Because putting an end to them sometimes creates bigger adversities in other departments.

Richard Nixon and Jimmy Carter could have stood to learn that 30 years ago, and China's leaders could learn from their mistakes today.

David Donadio is a writer and editor at the Cato Institute in Washington.

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David Donadio is a writer and editor at the Cato Institute in Washington, D.C.