Pump Prices Are Going Up, But That’s a Helluva Lot Better Than 1970s Gas Rationing

As Russia’s incursion into Ukraine continues, oil prices have risen due to worries about global supplies. CNBC’s Daniel Yergin, an oil analyst and historian said that this could lead to the most severe crisis since 1973’s Arab oil embargo, and 1979’s Iranian revolution. The 1973 oil embargo saw the oil price quadruple worldwide.

WTI (West Texas Intermediate) crude oil is currently at around $112 per barrel. This is an increase from $66 last year. Some analysts warn that oil’s price could reach $185 within the next year. Last June 2008, the global inflation-adjusted oil price reached similar heights.

Lutz Kilian, a researcher at the Federal Reserve Bank of Dallas said that “the one-month oil supply elasticity is very close to zero.” In a 2020 work paper. Simply put, oil supply increases in the short term when prices rise. Because it takes time to drill additional wells, construct more pipelines, redirect shipping, this is why the price of oil can fluctuate. You can expect prices to rise in the months ahead for fuel. The current average cost of a gallon regular gasoline is now $3.84. This compares to $2.71 in March 2008. In July 2008, the average price of a gallon of regular gasoline peaked at $4.06 (inflation-adjusted $5.19).

Russia is responsible for about 10 percent world oil daily, while its war against Ukraine has already disrupted its crude exports. Barron’s cites J.P. Morgan commodities strategist Natasha Kaneva’s observation that about 70 percent of Russian oil can’t find a buyer. She wrote that “While the US has so far resisted the urge to impose sanctions directly on Russian oil or gas, it was becoming increasingly obvious on Tuesday that Russian oil is being excluded.”

We’ve seen and survived worse than gas prices, however bad they may be. 

Nixon’s government imposed price controls including gasoline and oil, as inflation soared at the turn of the 1970s. The Nixon Administration increased price control on gasoline and oil in response to 1973’s oil crisis. They also promulgated standards for average fuel economy and established a 55-mph speed limit. Because petroleum companies are unable to make profit from drilling or importing oil, this led to widespread gasoline shortages.

The Nixon government used rationing to address gasoline shortages caused by the government. Christopher Knittel, a MIT economist noted that 1974’s gasoline shortages led to a national odd-even rationing programme. “Vehicles that have license plates with odd numbers could buy gas on odd days, while those with even-numbered plates could fuel up on even days.” Everyone could buy gasoline on the 31st to even out their access.

There were many price restrictions on domestic U.S. oil production until President Ronald Reagan eliminated them in 1981. Oil prices began to fall almost instantly.

What are our expectations for 2022

As the economies around the globe recover from disruptions caused by the COVID-19 pandemic, oil prices have risen over the last year. The rising price of oil prompted President Joe Biden to reprise some political theatre from his previous stint as a member of the Obama administration. He asked the Federal Trade Commission (FTC), to examine the conduct of the oil companies in an “anti-competitive” or other potential illegal manner. Responding to the Obama Administration’s request to investigate, the FTC issued a report in 2011 stating that crude oil prices “continue to be the major driver of gasoline price.” The shifts in demand and supply have caused changes in crude oil prices over the past five years.

This is the current state of oil prices, compounded by the added risk of a conflict in Eastern Europe. It is good to note that the Biden administration has so far not tried to duplicate Nixon’s disastrous price control errors.

Keep in mind U.S. foreign service officer James Akins’ 1973 observation: “Oil experts, economists, and government officials who have attempted in recent years to predict the future demand and the prices of oil have had only marginally better success than those who foretell the advent of earthquakes or the second coming of the Messiah.”

It’s not easy, but prices at the pump will increase in the short-term. However, this is still a far better option than gas rationing.