Price Control on Gasoline in the U.S. (1970s)

By Ashish Devadiga

The 1970s price controls had saved consumers between $5 billion and $12 billion a year in gas costs, but at the price of stifling domestic oil production and causing an artificial shortage of as much as 1.4 million barrels a day.

In the 1970s, when the price of crude oil tripled on the world market the then President of United States, Nixon imposed a price ceiling, on both crude oil and gasoline. There was a maximum price allowed by law to be charged for gasoline. Any gas station owner charging more than this maximum price would be guilty of fraud. Price controls were turned in to address the shortage of gasoline. This was done due to e public demand to keep the prices low. But the artificially depressed pump prices imposed during the oil crisis of 1973 — which stayed in place in various iterations through 1980 — brought about lines at gas stations and an artificial shortage of gas.

Dealers sold gas on a first-come-first-served basis, and drivers had to wait in long lines to buy gasoline. The price controls resulted in a fuel-rationing system that made available about 5 percent less oil than was consumed before the controls. Consumers scrambled and sat in lines to ensure they weren’t left without. Gas stations found they only had to stay open a few hours a day to empty out their tanks. Because they could not raise prices, they closed down after selling out their gas to hold down their labor and operating costs.

In an older version of Odd-Even policy, Oregan limited fuel supply to odd and even numbered cars on alternate days.

In an older version of Odd-Even policy, Oregan limited fuel supply to odd and even numbered cars on alternate days. Image Source: Business Insider

The true price of gasoline, which included both the cash paid and the time spent waiting in line, was often higher than it would have been if the price had not been controlled. In 1979, for example, the United States fixed the price of gasoline at about $1.00 per gallon. If the market price had been $1.20, a driver who bought ten gallons would apparently have saved $.20 per gallon, or $2.00. But if the driver had to wait in line for thirty minutes to buy gasoline, and if her time was worth $8.00 per hour, the real cost to her was $10.00 for the gas and $4.00 for the time, an overall cost of $1.40 per gallon

To meet the decrease in their revenues, gasoline stations would commonly charge for washing the windows, checking the tires, and so forth. The price of oil used in oil changes would be raised. Those having oil changes at the station were favored in access to gasoline during the years of the price ceiling. Some gas station owners ran the line to the gasoline pump through the car wash.

By the Iranian oil crisis in 1979, the controls had grown unsustainable as oil prices escalated in global markets. President Carter waived most of the controls on oil and gas prices to make more fuel available.

The resulting sharp price increases ushered in a new problem: double-digit inflation, as businesses quickly passed on their higher fuel costs and workers’ unions demanded cost- of-living increases to keep pace with higher prices. The surge in inflation put the Federal Reserve in crisis mode. It ordered it’s largest-ever increase in interest rates in October 1979, plunging the economy into a deep recession.

By the 1980s, Congress and the administration had figured out that price controls were not the answer. President Reagan, abolished the oil and gas price controls upon entering office in 1981.

Harvard University economist Joseph Kalt concluded that the 1970s price controls had saved consumers between $5 billion and $12 billion a year in gas costs, but at the price of stifling domestic oil production and causing an artificial shortage of as much as 1.4 million barrels a day.

The price ceiling did not really help and a better alternative would have been to let prices rise, giving oil companies an incentive to produce more and consumers an incentive to conserve.

Ashish Devadiga is a GCPP-13 alumnus

[This and the other two essays on Price Controls was submitted as part of the Economic Reasoning coursework. The question asked students to identify instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control. The 3 best answers were picked. The other two were on Price Control on Prescription Drugs in Europe and Price Control on Milk Products in Vietnam].

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