LINES AT THE GAS PUMP

As we discussed in the preceding in 1973 the Organization of Petroleum Exporting Countries ( OPEC ) raised the price of crude oil in world oil markets. Because crude oil is the major input used to make gasoline the higher oil price reduced the supply of gasoline. Long lines at gas stations become commonplace and motorists often had to wait for hours to buy only a few gallons of gas.

What was responsible for the long gas lines? Most people blame OPEC. Surely if OPEC had not rasised the price of crude oil the shortage of gasoline would not have occurred. Yet economists blame U.S. government regulations that limited the price oil companies could charge for gasoline.

As shown in before OPEC raised the price of crude oil the equilibrium price of gasoline was below the price ceiling. The price regulation therefore had no effect. When the price of crude oil rose however the situation changed. The increase in the price of crude oil raised the cost of producing gasoline and this reduced the supply of gasoline. As the supply curve shifted to the left from. In an unregulated market this shift in supply would have raised equilibrium price of gasoline from and no shortage would have resulted. Instead the price ceiling prevented the price from rising to the equilibrium level. At the price ceiling producers were willing to sell and consumers were willing to buy. Thus the shift in supply caused a severe shortage at the regulated price.

Eventually the laws regulating the price of gasoline were repealed. Lawmakers came to understand that they were partly responsible for the many hours Americans lost waiting in line to buy gasoline. Today when the price of crude oil changes the price of gasoline can adjust to bring supply and demand into equilibrium.

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