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Short Term Advantages and Long Term Disadvantages of Oil Price Freeze

Escalating Fuel prices

Escalating Fuel prices

Price Freeze: A Halt to the Economic Growth?

The market, as defined by Economics, is the interaction of the consumers and suppliers in buying goods and services, wherein consumers are driven by the motive to buy goods at the lowest price but with the highest utility. On the other hand, producers are guided by their main objective and aim, and that is to produce at certain production level which will gain them the highest profit, implying low cost of production but high revenue. Seeing that the objective of the consumers opposes that of the producers’, a compromise must be done.

Consumers and producers would meet together on a certain price, which is based at the point where the supply curve intersects with the demand curve known as the equilibrium point. However, as economic instability inevitably occurs, production cost of the suppliers increases as price of raw materials increases. Due to this, the point of equilibrium would be changed and so as the price, but the government, in some cases, interferes and creates market disequilibrium by imposing price controls on goods such as in petroleum products.

Although, the price freeze on oil alleviates the burden of consumers, government should take precaution in implementing it as it may cause economic downfall and unstable future prices of consumer goods in the medium run and even in the long run.

Short Term Advantages

Commuters, which take up a huge percentage of the population in most countries, as well as motorists, benefit from the stable price of oil. Through this seemingly good news of imposing oil price freeze, they are able to heave a sigh of relief. They are assured that the price will be stable for some duration. Hence, there will be no need for them to dread paying higher fare (due to transportation groups lobbying for a fair hike), and that is a huge saving for them especially for people living under poverty.

Knowing that there is a price freeze on oil, citizens feel secured that nothing like that would happen again. Moreover, consumers will feel more protected because the stable price of oil, as it implies lower cost on transportation, hinders price hikes on other goods. When there is an increase in the production cost and selling-related costs (e.g. transportation cost) of a business, prices of consumer goods will also increase impelling buyers to avoid purchasing. Conclusively, with lower price of oil, transportation expense will not hit that high and thus, will reduce prices of goods.

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Evaluation of the Disadvantages

On the other hand consumers of oil receive benefit, however, at the expense of the suppliers. As the price of crude oil in the world market increases, price of gasoline and petroleum products should follow. Subsequently, there is no unfairness for this matter, since the supply curve is also based on the cost of production. Governed by the same principle, cost of raw materials will naturally affect the curve. As the supply curve changes, the equilibrium point will move as well.

Due to price freeze, the price will not move toward equilibrium, giving advantage to the consumers but burdening the suppliers. The marginal or additional cost due to price increase of crude oil is being shouldered wholly by the suppliers exponentially decreasing profit as price of oil per barrel continue to rise. In commoditized markets, price tends to converge toward cost. Furthermore, in single product enterprises, the price of the product can be reflected directly by the cost of production. Hence, the stability of consumer products being enjoyed by the buyers is completely temporary.

Due to the constraints set by the government, supply of oil continues to dwindle. As a result, oil companies will start “rationing” fuel to their specific stations patterned on their usual “volume of sales”. In some areas, oil companies are forced to refuse to sell their products. This oil supply shortage causes dilemma on how traders would deliver their products. Consequently, they will try to find other alternatives which cost more, and eventually, increasing the expense on the transportation. The additional expense would then be added to the consumers and thus increasing the price of goods, in spite of the price control.

Wouldn't it be awesome if the fuels are priced this way? Well, except for diesel of course.

Wouldn't it be awesome if the fuels are priced this way? Well, except for diesel of course.

Evaluation of the Long Term Economic Consequences

Since most firms depend highly on petroleum products, collapse of oil industry brought by price freeze will cause economic downfall. Almost all business use trucks to transfer their product from cargos to their warehouses. Products circulate by transporting them from places to places using automobiles and delivery cars. If the oil companies cease to operate due to heavy losses, there would be impairment of our economy due to the immobilization of goods.

Furthermore, oil industry provides huge amount of revenue for the government through taxes. The aftermath of imposed price freeze would consist of “supply constraints” and “loss in revenues from taxes” from petroleum products; these would be desolating on the part of the consumers.

In addition, oil companies will not be able to sustain high net loss; therefore, they may opt to lessen their production or not to produce at all, leading to the occurrence of shortage and might pave way for “underground” transactions. When underground economy occurs, prices of oil would drastically increase by huge percentage. The “shift in supply and demand” reduces the quantity products consumed while increasing the price. Moreover, prices in an this market are often higher than the normal equilibrium prices due to the fact that it is unauthorized by the government and there is a huge risk in this system. In addition, the price of oil has direct impact on the rate of inflation. Therefore, if price of oil will dramatically increase, prices of all other goods will parallel the increase.

Oil Price Freeze in a Nutshell

The imposed price freeze may not beneficial in the medium or long run because it may interrupt the natural flow of the market. It may seem ideal at first phase but in the latter years, repercussions would be very much devastating. Furthermore, prices would increase and thus creating inflation. This would damage the economy that may even cause its fall. Both consumers and suppliers would be greatly affected by the destruction dealt by the market disequilibrium, which in turn is caused by the price freeze. Hence, to evade future economic flux and inflation, government should avoid carelessly imposing price freeze.

How about you? What's your view on this? Check out the poll, and share your thoughts.

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Renz Kristofer Cheng (author) from Manila on August 05, 2012:

Yup, theoretically this would happen. But still, there are various schools of thought regarding price controls and their effect in the economy.

Thanks for dropping by danielabram! :)

danielabram on August 05, 2012:

Price controls create a false appearance of stability. Then once they are lifted, the markets experience huge gyrations in order to reach equilibrium. Am I correct?

Renz Kristofer Cheng (author) from Manila on June 03, 2012:

Thanks Rex Michaels! I agree.

Oil really has a huge significance not just in the economy, but in the world itself. That's why crisis in oil usually leads to conflicts. But I hope that these conflicts will be kept at bay, and wouldn't be aggravated into something bigger.

rex michaels on June 03, 2012:

Well done, you make it so even I can understand. It is staggering the dependence we have on oil, but it is where we are at in the world at this point.

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