Price Controls impact on Energy

Many countries artificially keep the price of oil low to insure domestic stability. Examples include China, Pakistan, Arabian Gulf Countries, and more. So what does this do to the world economy and environment?

It reduces the incentive to be efficient with energy, because of low prices. This increases demand and increases prices of oil. What I have seen is lower efficiency operations are also more polluting. For governments, this also increases deficits which reduce funding for other areas. Price controls can also reduce investment for developing future oil supplies. Why would it reduce investment? Because somebody needs to pay the difference in cost between retail and wholesale and what is the incentive to find new supplies with limited profits? Many US oil fields due to age have higher production costs, and when oil prices are low they are not economical. With price controls, what usually happens is black market activities allow access at higher prices, where at the fixed state prices, there are shortages. Vietnam and Iran have smuggling issues, since neighboring countries higher prices lead to highly profitable smuggling of subsidized oil and/or refined products. Often the state set prices cause producers to take a loss (and most companies are not willing to take losses).

In the US, the relatively low prices for oil has led to low demand, until recently, of smaller cars. SUV's and other fuel guzzling vehicles have ruled the road. In Europe, high gas prices has led to more fuel efficient vehicles. Hybrid sales in Europe don't seem to have a high market penetration, which I don't understand yet.