FEO and the Gas Lines; M. Friedman

How is it that for years past, you and I have been able to find gas stations open at almost any hour of the day or night, and have been able to drive up to them with complete confidence that the re quest to "fill up" would be hon ored with alacrity and even with a cleaning of the windshield? To judge from the rhetoric that pol lutes the air these days, ,it must have been because there was a powerful Federal Energy Office hidden somewhere in the under ground dungeons in Washington, in which an invisible William Simon was efficiently allocating petroleum products throughout the land, riding herd on greedy oil tycoons lusting for an opportunity to mess things up and create long lines at their gas stations. Of course, we know very well that the situation is precisely the reverse. The lines date from the creation of a real Federal Energy Office run by a very visible, able and articulate William Simon.

Which is the cause and which the effect? Did the lines produce the FEO or the FEO the lines? After the Arabs cut output, Germany imposed no price con trols on petroleum products. It did initially restrict Sunday driving but soon removed that restraint. The price of petroleum products jumped some 20 or 30 per cent, but there were no long lines, no disorganization. The· greedy con sumers found it in their own in terest to conserve oil in the most painless way. The greedy oil ty coons found it in their own inter est to see to it that petroleum products were available for those able and willing to pay the price. Other European coulJtries, like the U.S., imposed price controls. And, like us, they had chaos. The Arab cut in output can be blamed for higher prices, but it cannot be blamed for the long lines. Their creation required the 263 264 THE FREEMAN May cooperation of shortsighted gov ernments.

The world crisis is now past its peak. The initial quadrupling of the price of crude oil after the Arabs cut output was a temporary response that has been working its own cure. Higher prices in duced consumers to economize and other producers to step up output. It takes time to adj ust, so these reactions will snowball. In order to keep prices up, the Arabs would have to curtail their output by ever larger amounts. But even if they cut their output to zero, they could not for long keep, the world price of crude at $10 a barrel. Well before that point, the cartel would collapse. The effects of consumer and pro duce,r reactions are already show ing up. The European countries that introduced rationing and re strictions on driving have elimi nated them. World oil prices are weakening. They will soon tumble. When that occurs, it will reveal how superficial are the hysterical cries that we have come to the end of an era and must revolutionize our energy-wasting way of life.

What we have been witnessing is not the end of an era but simply shortsightedness. At home, unfortunately, our problems will not be over so soon. The panicky FEO forced oil com panies to shift so much production to heating oil that we face a glut of heating oil but a paucity of gasoline. The FEO's allocations among states have starved some, amply supplied others. Its order that refineries operating at high levels must sell oil to those operat ing at low levels sounds fine. In practice, however, it reduces the incentive for the recipients to buy oil abroad and produces a waste ful use of oil at home. We have the worst of both worIds: long lines and sharply higher prices - indeed, higher than I believe they would have been without the waste resulting from FEO controls. Is rationing the solution? Far from it. It is the problem. We al ready have rationing of producers and distributors. Coupon ration ing of final consumers would simply be the hair of the dog that bit you.

The way to end long lines at gas stations is to abolish FEO and end all controls on the prices and allo cation of petroleum products. Within a few weeks, your friendly dealer would again be cleaning your windshield with a smile. How can thinking people believe that a government that cannot de liver the mail can deliver gas bet ter than Exxon, Mobil, Texaco, Gulf and the re-st? f) Copyright Newsweek, Inc., March 4, 1974. Reprinted by permission.