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Iraqi Gasoline Price Controls

Gasoline price controls in Iraq are responsible for retail gasoline shortages and a withering decline in refining capacity.

BAGHDAD, Iraq (Reuters) — The country with the world's third largest oil reserves should not run out of fuel.

But Iraq has come perilously close to doing just that. To save fuel, and to general confusion, the government has ordered half the capital's car fleet off the roads on any given day.

Tuesday was the first day of the new rule, and only cars with licence plates ending in an odd number could take to the streets. [source]

Widespread gasoline shortages have led to rationing. This is the predictable effect of price controls. Price controls prevent markets from clearing, creating shortages or gluts. The gasoline price caps in Iraq have created shortages because when a product is nearly free, people will attempt to buy more of it.

[The rationing] owes to years of under-investment in Iraq's creaking oil refining and distribution sectors, which have left the 2.5 million barrel per day producer unable to meet its domestic demand for gasoline and other essential oil products.

One-third right. It's true that under-investment in refining and distribution are a problem for supplying enough gasoline. Missing from this report is the fact that price caps cause demand to increase. Also missing from this report is the fact that subsidies disconnect producers and consumers of gasoline, insulating the producers from market forces also. Their profits are guaranteed; they don't need to invest in infrastructure. Why bother? Cheaper production won't increase profits — not that state-run enterprises care about profits to begin with. The whole "market" (and I use that term loosely) is rigged so that it basically doesn't matter how much anyone produces or consumes.

No one should be surprised it's a disaster.

Shortages have become inevitable, creating queues and a thriving black market for gasoline, which, because of subsidies, officially costs just over one U.S. cent per liter.

There's another loss here. To obtain supplies for the black market, I've read that there are people who simply wait in line at filling stations instead of pursuing productive careers. They treat waiting in line as their job, and the price controls make it hugely profitable to do so because the black market price of gasoline is so much higher than the controlled (but shortage-inducing) price.

Economic theory predicts all these problems as unintended consequences of price controls. This ought to be a teachable moment. Politicians sorely need a lecture from economists.

Tiny Island