The Ecuadorian market for gas is organized in the following manner. The state has a monopoly on gas importation. Once imported, the gas is then pumped into barrels and distributed by both public and private companies. The private companies distribute a large majority of the gas that is sold nationally. However, these companies are subject to state regulations which determine how they store the gas for distribution, how much gas they are able to sell and to whom and at what price they are able to sell it. In other words, these “private” companies decide for themselves little more than their names. In Ecuador, perennial scarcity of and black markets for gas have resulted from this type of market organization.

Highly regulated and closed economies, such as that of the Soviet Union, have demonstrated to us the disastrous results of price controls. In these economies, a pronounced scarcity of basic consumer goods soon develops; black markets flourish immediately.

In its application of highly regulatory public policies, the Ecuadorian government does not facilitate the nation’s progress, but instead impedes it. Indeed, the regulation of gas illustrates how the government’s clumsy hand does more harm than good. In fact, in Ecuador the regulatory experiment with gas has resulted in the redirection of between 65 and 70% of the gas designated by authorities for use in homes to commercial and industrial zones; only 5% reaches residences. The better part of the remaining 25 to 30% of the gas goes to various informal commercial and industrial businesses or is shipped as contraband to Peru and Colombia where gas is not subsidized.

It is estimated that 20,000 barrels of gas are diverted from the border town of Huaqillas each month.

Each gallon of gas that is imported has a real cost of 89.7 cents, but costs the Ecuadorian consumer only 19.5 cents. The difference is not free- it is paid by the government. Thus, this year $281.4 million will be withdrawn from the government’s budget, money which will not be repaid since the price of gas will not be revised. In 2004, the cost of the subsidization of gas to Ecuadorians was $139 million.

Who benefits from this spending?

Many believe that the poor benefit. However, in reality the subsidization of gas benefits only the contrabandists, who are no more than businessman taking advantage of a business opportunity. Subsidized gas and price controls have created opportunities for such businessmen at the expense of all Ecuadorians.

Naturally, many condemn the contrabandists or fault the lack of public control for their persistence. But this is just one more bad habit that perpetuates the honeymoon now enjoyed among businessmen and officials. As one merchant said, “Negotiations take place with the authorities themselves. That is why the contrabandists are allowed to pass right through.”

Aware that the regulation of gas has been a complete failure, the Minister of Energy, Iván Rodríguez, has proposed a magical remedy: more control. Mr. Rodríguez, like many others, is under the impression that market forces can be suppressed with more or better regulation. He and the others like him will remain under this impression even as they collide with the harsh reality that all of their costly efforts to control the price, distribution and supply of gas have failed once again.

Indeed, in accordance with current regulations, a person who uses gas designated for home consumption for commercial ends can be put in jail. But here the problem is that there would not be space in prisons sufficient for all the “delinquents” who would be convicted of this “crime”.

Milton Friedman, who experienced price control mechanisms first hand as an advisor to a department of the United States government in Germany after World War II, explained how price controls do not produce desirable results even when strictly enforced. In his experience, the vast military presence that enforced price controls allowed occupation authorities to institute perhaps the only controls which have in fact been strictly implemented. It is likely that there is no other example in history of such strict control, since each time an attempt at price control has been made black markets have spontaneously appeared. In this instance, the imposition of price controls was successful. However, what did result was the replacement of a large portion of German money with cognac and tobacco. In effect, says Friedman, “cognac became the most liquid means of exchange.” In Friedman’s experience in Germany, a parallel black market with higher prices did not emerge, but instead a black market in which German money had been substituted by cognac and cigarettes.

Indeed, the miraculous recovery of the German economy is attributed to Ludwig Earhart, who was Finance Minister of Germany at the time. One weekend, he took advantage of closed military barracks and soldiers not enforcing any type of control to abolish all price controls. This action contributed to the duplication of the German GDP in one year. In this way, the German economic miracle is essentially attributable to the elimination of price controls. That is, only when prices established in the market served as a point of reference for the efficient allocation of German resources did miraculous economic growth arise.

The market solution to our gas problem is simpler and cheaper than is supposed. Our politicians claim to want to promote the social wellbeing of Ecuadorians. What better way to do this than to liberate the forces of the market to achieve a more efficient allocation of the resources which, although we may not like it, are scarce. More than 40 years of experimentation with subsidies and regulations to resolve the gas problem ought to be sufficient evidence against this type of remedy.

Let’s return to Ecuador in the year 2005. Why is it supposed that the control of gas prices and the subsidization and regulation of gas will work now?

* Gabriela Calderon is the editor of elcato.org

Translation: Harry Moroz