ONE need not have a degree in economics—with a fundamental working knowledge of the law of supply and demand—to know that price controls never quite work or give the results. First of all, if products are sourced locally, producers would balk at selling below their cost of production. Middlemen have to make their own mark-ups, and the retailers add to the cost of the product. Any disruption in the supply chain will result in dislocations in the marketplace.

My economics professors back in college would blanch at the thought of price controls being imposed on necessary commodities. This was a common practice in the socialist states before the ’90s, and we saw what happened in the marketplace: long queues for nonexistent or rare products; shoddy products that displayed poor workmanship; an active black market that sought to supply (for a fee) the products not available in the market; and production lines that had no incentive to produce superior goods or to resort to innovation or invention.

The wily Chinese, with centuries of entrepôt mercantilism built into their collective genes, quickly embraced (most of) the rigors of free markets through their curiously named brand of “market socialism.” They quickly shrugged off the shackles of a failed socialist experiment and began the process that has made them into the economic juggernaut that they are today. Essentially, their brand of market socialism simply means that the Communist Party remains as the fulcrum and center of power, but both state and private enterprise have been allowed to develop and fend for themselves in the marketplace. Of course, they have had the incredible buffer of over a billion consumers to cushion any shortage in demand abroad, as what is happening today as international economies adjust to depressed consumer demand.

My classmate, Energy Secretary Angie Reyes, has had to deal with a fundamental problem of late. His boss, who is a trained economist, has embarked on a populist course by imposing price controls on the price of oil and oil products. The oil companies have grudgingly complied, but have indicated that they will not necessarily import any more oil at the adjusted prices they are supposed to sell the products. The results will be classic: Gas stations will have less of their products to sell, and consumers will have to find other ways to pursue their active lifestyles; LPG and other derivative downstream products will become more scarce; and an active black market may result, with enterprising businessmen setting up guerrilla filling stations to help meet the pent-up demand for gasoline products.

In the end, the government will be forced to import oil at world market prices—because the world market will not show any mercy to any country just because it decided to undertake a benighted policy—and sell these at a discount in the market, absorbing any loss incurred just to maintain said fixed prices.

When one breaks down the price of oil at the pump, one finds that almost half of the cost consists of a cornucopia of taxes that the government has imposed. The answer is clear: If the government chooses to be popular, it can achieve this goal by giving a discount in the tax rate for imported oil, and achieve its desired goal without disrupting the marketplace or tampering with market mechanisms.

Free Enterprise is a rotating column of members of the Financial Executives Institute of the Philippines, appearing every Wednesday and Friday.