Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

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Monday, December 20, 2004

Gasoline Price Controls, modern style

[With thanks to JC].
The United Arab Emirates is a collection of smaller emirates, unified into one country. Abu Dhabi is the big emirate with most of the oil. Furthermore, it de facto sets the retail price of gasoline for all the other emirates, and sets it well below the refined equivalent of the world price of oil. Some people have suggested that these price controls are in place as a way of redistributing their oil wealth to the other emirates in the country.

That might be okay if Abu Dhabi took the direct hit from subsidizing the below-cost pricing. But as JC writes to me, "...the retail station networks with the greatest market share are owned by Dubai, yet Abu Dhabi is the one with 90% of the oil and probably most if not all of the refining capacity."

Meanwhile, the executives charged with operating the refinery and retail operations have appealed to the Ministry of Petroleum and Mineral Resources for either subsidies or permission to raise the price of refined gasoline. (see
here and here)

Here is an excerpt from an editorial in the
Gulf News:

As ... the much-touted $22-$28 band [for the world price of oil] has virtually disappeared into the depths of history, retail oil companies in Dubai contemplate their losses and wonder how they can recover from the parlous situation. ...

Of equal concern, however, is the anomaly that persists in maintaining a fixed retail price at the pump. Not only is the price artificial, it could also be a contributing factor to the ever-increasing number of vehicles that ply the roads...

To make their point, the major retailers threatened to close all their gas stations. They began by closing ten stations, but the threat was quickly rescinded for reasons that are not altogether clear. And, of course, the possibility of allowing gasoline prices to rise to reflect the world price of oil does not sit at all well with consumers.

With the world price of oil falling recently, the cost pressures on the UAE gasoline retailers have abated, but when prices are regulated, the process leads to distortions throughout the economy. For more on oil and gasoline production in the United Arab Emirates, see
here and here.

And if you want to see a total misunderstanding of what price controls can do in the way of causing gasoline shortages, just think "NPR", as Peter Mork points out very effectively here in his discussion of the assinine low prices of gasoline (and attendant extreme shortages) in Iraq. According to NPR, "...The Iraqi government has no clear explanation..." for the shortages.

How can economists make it clearer that when there's a price ceiling, the quantity demanded will exceed the quantity supplied?

Update: Alex at The Marginal Revolution has just posted a lengthy quote on this same topic from The Economist.

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