Good example of how Bell South was affected. I have mentioned this before, but I think it is important to understand that economics should reflect reality. There are real events that take place in the world, which hurt businesses and consumers. Good economic policy seeks to deal with such problems and not to cover them up.

For example, the combination of high Chinese demand for oil coupled with hurricanes Katrina and Rita hitting oil production and refining capacity in the Gulf of Mexico and surrounding states were real events. One of these events was dramatically increasing world demand for oil, while the other event was hurting US supply of oil and petroleum products.

 As you all know, if the demand curve shifts to the right and the supply curve shifts to the left, the price is going to move higher.

When the price increases, it sends a signal to participants in the economy. The opportunity cost of using gasoline and other oil products increased for consumers. In other words, consumers had to give up more of other things to fill their tanks. This caused many consumers to make the decision to drive less and thus the consumption of gasoline of oil products decreased.

 On the supply side, the higher price and related increased profits to producers acted as a strong incentive to bring more supply to the market. Note that more costly methods of delivering products to the market, which were not profitable in the past were now profitable at the higher price. 

 This reduction in the amount consumed and the increase in product delivered to the market allowed us to pass through these problems without long lines at the gas pumps. Instead of long lines at the pumps and closed gas stations, people could pull up and buy all the gas that they wanted to buy at the higher price. While there was plenty of complaining about the price, consider the alternative.

 What if in response to the high prices Congress sought to deny the reality behind the price and passed a law that capped gasoline prices at $2.00 per gallon. At $2.00 the amount demanded would not decline and there would be no profit incentive to attract new supply.

The gap that would be opened up between demand and supply would mean that high prices would be exchanged for long lines and closed gas stations. In other words, the reality on the ground must be reflected in the market one way or another. It can be handled in an organized manner with the smallest negative impact on the economy by allowing the price to rise and the market to function. Alternatively, the reality can have a much greater negative impact if government policies are imposed, which interfere with this adjustment process.

A policy which was proposed in Congress other than price controls was to impose a windfall profits tax, which would have severely limit the amount of profits that could be made by oil companies. Consider how this policy would interfere with the adjustment of the market. The strong signal to bring more product to the market would have been stifled. Those extraordinary measures to increase supply that make sense with high prices would not be profitable to suppliers with the imposition of a windfall profits tax.

 Now, look at what actually did happen when the market was allowed to function. The very real pressures on the market pushed up the price, but without the country facing shortages and long lines at the pumps. The damage from the hurricanes was repaired and gradually supply returned to normal. This increased supply and reduced consumption pushed up inventory levels. This in turn put downward pressure on prices.

By allowing the market to function, the reality on the ground was reflected in the price. Participants in the economy adjusted. As the reality on the ground returned to a more normal situation the price reflected that change and declined dramatically.