I wrote earlier about all the wiggles that American politicians made after hurricane Katrina hit. Here's a worst-case example of what happens when politicians do more than wiggle and start getting serious about price controls:
Petrol Rationing Creates Black Market in Iraqi Kurdistan
Another article on the topic claims that the price controls go as low as 5 cents per gallon--fully 1/60th of the current market price inthe US:
For Iraq's Motorists, It's Abundance by the Drop
Iraq, one of the most oil-rich countries in the world, has been price-controlling their domestic gasoline. The current natural market price is now higher than the price cap, and as a result the local gas supplies are running out. Why should suppliers sell locally when they can sell internationally and get a better price? To counteract the shortages, Iraq is now employing rationing. In turn, people respond to the rationing by selling their allotments to each other in a black market. Read the article for more -- it paints a good picture.
In addition to being a lesson that keeps getting learned the hard way--price controls lead to shortages lead to rationing--I find it fascinating that the first cited article above doesn't even mention the possibility that price controls are the root cause. I also find it fascinating that it lays out the developing black market in detail but stops short of the conclusion that, in this case at least, markets (a) are effective and (b) what people want to do. The result right now is that there is a lot of government and police involvement, but people on the street are using a plain old market and getting plain old market prices anyway, only doing so illegally.
Iraq needs to go either forward or backwards with its price controls. To go forward, Iraq will need to further tune its rationing scheme and further improve its enforcement forces. This means a substantial increase in the government's involvement in people's lives, but that's what price controls ultimately entail if they are to be effective. To go backwards, they could open the market up like in the US and simply allow the gas prices to float to a higher level -- along the way, providing a monetary encouragement to those in the domestic oil industry to improve their capacity.
For completeness, there is also the horrible possibility of stalling in the status quo. Iraq could simply leave its black market alive and make occasional token raids on it, thus setting up a situation like the recreational drug markets in the US. Surely this is the worst choice, however. In addition to not solving the original problem of gas shortages, it makes large segments of the population into criminals, thus allowing the police and those who control them to target citizens selectively.
I hope that Iraq moves either forward or backward on its energy price controls: either more control to stamp out the offenders, or more freedom to allow people to legally work out this problem for themselves.
Bryan Caplan has a good blog entry on this. Sadly, news.google.com has almost nothing at all.