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A Solution to Oil Shortages

Some of us remember the the late seventies, when there were lines at the pump and rationing of gasoline. But the problem of oil shortages isn't just about the inconvenience. Numerous elderly people actually died in the New York City area because of a lack of heating oil, and many people thought it would only get worse, that we would run out of oil completely before long.

However, at the same time, gold and many other things much rarer than oil were available to anyone who wanted them. They always are, and this gives us a clue to what causes an oil shortage, or any other shortage. Normally, it is just one thing.

Shortages Are Caused by Price Controls

Almost all long term shortages of basic commodities in a modern economy are caused by price controls. Unfortunately, other than economists, not many people know this. Voters clamor for price controls when prices rise, and these controls then cause shortages. They cause them in about ten ways. What follows is examples of three of these ways.

1. Under price controls, the law said that oil producers couldn't sell oil for more than a certain amount. Naturally they immediately closed wells that were producing at a cost higher than that. This reduced the supply of oil, and reducing the supply sure isn't a cure for a shortage, is it? Of course you wouldn't pay your boss to work for him, so why would a company pump oil at a loss?

2. Because they had a price limit, they sold more to closer customers. It saved them money on delivery costs, and explains why heating oil was in short supply in New York, which is far from the major oil fields. Place farther away had worse shortages.

3. Because prices were held artificially low, some couldn't get heating oil or gasoline, other's wasted gas on pleasure trips they might not have taken if the price were higher. Of course this further reduced supply. If gas was $20 a gallon you might travel less, right? The same principle is true at any price point.

A Solution

Price controls force a misallocation of resources. Ordinarily the market determines where the oil goes. If it's to expensive, people cut back on pleasure trips, but nobody dies for a lack of heating oil. The high price also brings about it's own resolution, because now it becomes profitable to drill more wells, to make electric cars, and otherwise develop new technologies.

Imagine an extreme example for a moment. If the law said no gas could be sold for more than 30 cents a gallon, no other transportation technology could compete with gasoline-powered cars, so none would be developed. Also, no new wells would be dug, so we'd quickly run out the existing supply. Having no alternatives developed, it would be a catastrophe. Simply letting prices go up and down naturally according to market forces is the solution to this or any oil shortage.

Consider that some of the rarest things on the planet are available to you all the time - if you pay the price. All the gold in the world could be put in a large barn, and yet you can buy gold anytime you want. It is only price controls that cause lasting shortages. Remember this the next time there are shortages in a basic commodity, despite the government's best efforts. In the end, all their efforts are just politics, and if there is an oil shortage, you can be sure that they caused it.

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Oil Shortages