substitute, whereas Chase Manhattan would presumably regard
these as inadequate substitutes.)
3.2
PROVIDING CAPITAL IN FREE MARKETS
In a free
market there can be no such thing as a shortage. This statement
holds when either the quantity desired by consumers or the quantity
offered by producers responds to price. Any potential deficit in
supply is always removed by some increase in price, and any
potential surplus is removed by a fall in the price, there always
being some price which the market will clear.
The
assumptions necessary for this proposition are unquestionably valid
for the various petroleum markets. In the long run, there is no
doubt that higher prices would bring about greater supplies.
Numerous studies have shown an appreciable response of oil and gas
supply to price. Also, in the long run there is no question that
consumer demand will fall with higher prices for products such as
gasoline, heating oil, heavy fuel oil, and natural gas. Evidence on
gasoline is readily forthcoming from the European experience, with
very high prices causing a much smaller consumption, principally by
the use of smaller automobile engines, and from the study of
Houthakker and Verlager which is expected to be published in this
series.
But even in
the short run, greater supplies will be had at higher prices, and
smaller quantities demanded at higher prices, although these
responses will be much smaller and require larger price movements
to clear the market. Experience in the petroleum market has
confirmed this on many occasions. For example, during 1970 there
was considerable concern about a potential shortage of heavy fuel
oil due to rising demands for clean fuels and a shortage of natural
gas caused by price restrictions. The response of the federal
government at that time was to let the free market handle this
potential shortage. The result was a substantial increase in price,
but no cases of shortage. The Office of Emergency Preparedness
investigated over fifty cases of alleged shortages, particularly in
the New England area, and found that in no case was the claim
supported.
Thus, the
role of the free energy market in eliminating shortages and
surpluses is not simply a theoretical or academic point. When
allowed to work, the market works. If the effectiveness of the
market in this respect is not obvious in the energy field, it is
because it is commonly not allowed to work.