January 02, 2006
A Followup on the Iraq Fuel Price Fiasco
Lew Rockwell, a bit of a free-market fundamentalist, but that's not usually a bad thing, gives a 101 level explanation of why price controls and subsidies have a bad effect:
The mystery to explain is why a country that is incredibly oil rich – with the 2nd largest oil reserves in the world – would face a massive shortage of all oil products. If you knew nothing more than this detail, and you knew something about the history of economic debacles, you might guess: price controls. You would be right.
From what I can gather from public sources . . .what is unique [to Iraq in the region] is the combination of subsidies and price controls that led gasoline to be fix-priced at 5 cents per gallon until very recently. You don't have to be an economist to know what the results of this policy would be. Not only does it lead to overconsumption [but] the number of vendors willing to distribute the stuff in the open market collapses. What’s left is bought in Iraq and sold to neighboring countries at a profit.
Thus does a policy designed to make oil cheap for all result in the bizarre world in which a country full of oil underground would not have any of the stuff available above ground.
Posted by Matthew Hogan at January 2, 2006 04:09 PM
Filed Under: Economic Policy
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This is well said and true enough. However, this is Iraq we are talking about, and there are other details which may not be condusive to solving this problem via a freer market. I am thinking mainly of the fact that Iraqis have been paying very little for their gasoline since time immemorial and they seem to have come to consider it their God-given right. If they had to pay market prices, it may mean that Iraq would no longer enjoy its current level of peace and serenity.
Posted by: Shochu John at January 2, 2006 08:17 PM