As we discussed in (he preceding chapter, in 1973 the Organization of Petroleum Exporting Countries (OPEC) raised the price of crude oil in world oil markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline- Long lines at gas stations became commonplace, and motorists often had to wait for hours to buy only a few gallons of gas
What was responsible for the long gas lines? Most people blame OPEC. Surely, if OPEC had not raised tlx- price of c rude oil. the shortage of gasoline would not have occurred. Yet economists blame L'.S. government regulatkms that limited the price oil companies could charge for gasoline.
Figure 2 shows what happened. As shown in panel (a), before OPEC raised the price of crude oil. the equilibrium price of gasoline, Py was below the price ceiling. The price regulation, therefore, had no effect. When the price of crude oil rose, however, the situation changed. The increase in the price of crude oil raised the cost of producing gasoline, and this reduced the supply of gasoline. As panel (b) shows, the supply curve shifted to the left from 5, to i>:- In an unregulated market, this shift in supply would have raised the equilibrium price of gasoline from P, to P,, and no shortage would have resulted. Instead, the price ceiling prevented the prke from rising to the equilibrium level. At the price ceiling, producers were willing to sell C2vatxl consumers were willing to buy Q(1. I hus, the shift in supply caused a severe shortage at the regulated price.
Eventually, the laws regulating the price of gasoline were repealed. Lawmakers came to understand that they were partly responsible for the many hours Americans lost waiting in line to buy gasoline. Today, when the price of crude oil changes, the pricc of gasoline can adjust to bring supply anil demand into equilibrium. •
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