Oil Price Controls in China

Mark Thoma tells us to read the excellent articles Keith Bradsher has been writing about the effects of energy price controls in China:

Fuel Shortages Put Pressure on Price Controls in China - New York Times: Sudden shortages of gasoline and diesel in Southeastern China are reigniting a debate here: Is pressure from state companies, coupled with freely available information on oil prices, driving China to accept market forces faster than it may have wanted?

Dozens of service stations in Southeastern China, notably in cities near Hong Kong, abruptly ran out of fuel this week just as officials in Beijing were debating requests from domestic oil companies to charge more for diesel and gasoline. The shortages have produced long lines of angry motorists... disrupted some freight shipments.... Sinopec, the state-controlled oil company that dominates the refining of fuel in China, especially in Southeastern China, said late Wednesday that the shortages were a result of people stockpiling fuel now that they have enough information to bet on the direction of oil prices.... People in China today have much greater access to information about world prices than ever before, and as they see high world oil prices, they are topping off fuel tanks in expectation that China will soon raise domestic prices, Mr. Jia said. "They buy inventory for their own tank in the hope the price will be changing," Mr. Jia said. "People think the trend in China should be toward a price increase."

While there are no good figures on the private storage capacity for fuel in China, oil experts say it is probably considerable as years of electricity shortages have prompted factories across the country to install backup diesel generators with large fuel tanks....

[T]he timing of the latest shortages, coinciding with an active debate in the government-controlled news media over whether China should liberalize retail energy prices, has made many energy analysts suspicious of these rationales. Sam Dale, an Asian oil analyst in Singapore with Energy Intelligence, a newsletter-publishing company based in New York, said oil companies appeared to be putting pressure on the Chinese government to free retail prices, by... holding back supplies from the market.... Sinopec's refineries are operating at 89 to 90 percent of capacity, compared with past rates as high as 97 to 98 percent, Mr. Jia said. There is a shortfall mainly because some refineries are closed for maintenance, but some refinery managers are also reluctant to produce at full tilt when retail prices are low, he added...

Comments

[anne]

Here then is the original article:

http://www.nytimes.com/2005/04/19/business/worldbusiness/19energy.html?ex=1124942400&en=7d3c17ed58675f16&ei=5070&emc=eta1

April 19, 2005

The Great Engine of China Is Low on Fuel
By KEITH BRADSHER

GUANGZHOU, China - Service stations across China are starting to run
short on diesel this spring, while electricity blackouts here in
southeastern China are growing worse as power stations cut back on
purchases of fuel oil.

For truckers and factory owners, the diesel and electricity shortages
are a nuisance, sometimes a costly one. The Guangzhou Boaosi Appliance
Company, which makes refrigerators here, is without electricity from
the municipal grid four days a week, and just bought a costly
generator last month to continue operating on diesel.

The diesel and power shortages have one thing in common: they are
largely the result of the clash between China's Communist past and its
increasingly capitalist present. The government has set retail prices
too low for diesel and electricity. So businesses, facing high world
oil prices, are supplying less of both.

Disruptions in Chinese markets for fuel oil, diesel and other oil
products are causing ripples in global markets in turn, as traders and
investors around the world struggle to interpret the effects on
international oil supply and demand.

The puzzle for oil analysts is how Chinese households, factory owners
and refinery managers will react when the government eventually
liberalizes prices, which is expected in the next few weeks.
Government officials have already announced that they will raise
retail electricity prices for industrial users, although probably not
homes, on May 1. An increase in diesel prices is also widely expected....

[anne]

http://www.nytimes.com/2005/04/19/business/worldbusiness/19energy.html?ex=1124942400&en=7d3c17ed58675f16&ei=5070&emc=eta1

The Chinese government raised the regulated retail price of gasoline
by 7 percent on March 23, to $1.66 a gallon. But it left diesel
unchanged at $1.57 a gallon to avoid antagonizing farmers, who need a
lot of diesel in their tractors for spring planting.

Speculators across China have responded by hoarding diesel in the
expectation of a price increase after the planting, said Evan Jia, a
spokesman for Sinopec, China's main refiner.

To make matters worse, refiners shifted at the end of last year toward
producing more gasoline and less diesel from each barrel of oil. They
have refused to go back on that decision, even stepping up exports of
diesel in response to low prices at home.

"We do not want the marketplace to give us indications" of how much
diesel to produce, when it is hoarding that is driving the market, Mr.
Jia said.

At the same time, half of the power stations fired by fuel oil here in
Guangdong province have been closed for part or all of the last month.
Global prices for fuel oil, a heavy oil not used much in the West but
relied on by the Chinese to power many electric plants, have climbed
sharply, but power companies have not been allowed to charge more for
the electricity they produce; the government-controlled Shenzhen Daily
recently reported that fuel-oil imports had dropped by half last
month.

A small increase in diesel and electricity prices could have the counter-

intuitive effect of increasing China's oil imports, said Jeff Brown,
an oil demand analyst at the International Energy Agency in Paris.

A small increase could make refiners willing to sell more diesel, and
power companies willing to generate more electricity, while having
little effect on residents' desire to buy diesel and power, he
explained....

[anne]

China's planners will continue to try to insulate farmers against increases in fuel prices, so the problems of Chinese shortages at current international energy prices will not be easily resolved. But, China's planners have been fairly adept at handling tight allocation problems for the past decade.

The effects of high energy prices are changing production and consumption patterns in an important number of developing countries, and I wish more attention were being given the changes.

[anne]

Darn, sorry about the line breaks on the New York Times posts. I simply made a mistake in copying my archived article. The original article is well worth reading though and the links I posted will give an easily read article. Now to learn to adjust this new computer screen properly :)

[Roehl Briones]

Econbrowser's got a great discussion on it, linking fuel demand growth to government subsidies. In 2003 the fiscal deficit was 2.5% of GDP; I don't have 2004 figures available, but I bet those 2004-2005 deficit ratios are going to spike - just like those oil prices.

[nate]

anne:

if it is okay to ask...

why a new monitor? what kind did you get and why? what do you make of Dell's recent earnings announcement and explanation?

http://money.cnn.com/2005/08/11/technology/dell_analysis

[DOR]

One of the reasons why cities near Hong Kong run out of petrol is that their prices are much lower than prices in Hong Kong (now US$6.70/gal). Truckers arbitrage. Oh, and you can’t buy anything less than 98 octane in Hong Kong.

The Guangzhou Boaosi Appliance Company’s diesel generator is one of the reasons Hong Kong has such bad air pollution.
.

[gary lammert]

As new economic bloggers emerge, here is yet another with a novel approach:

Is the global economy at the brink of a breakdown much greater than its predecessor in 1929? How do the current imbalances compare to those late Roaring Twenties' similar circumstances of consumer-level forward consumption, debt, overvaluation of assets, and industrial overcapacity? Will the devaluation and asset decay process at the end of the second 70 year sub-fractal - contained within the 140 year Second Grand Fractal cycle beginning in 1858 - be greater than at the end of its first 70 year sub-fractal?

A chicken in every pot and two cars in every garage has been replaced with eating out three of seven nights at the plethora of fast food and dining opportunities that 'froth' the highways and typify the service type of economy the States have become. Three SUV's and a Hummer distributed between a primary residence and an investment residence have superseded the two cars in a garage. Buy a radio or washer on credit has been bested with buy and buy with abandon everything imaginable with ubiquitously facilitated debt from refinanced or second mortgages based on the surety of ever appreciating house prices -the latter caused in part by fed fund rates 1/4 of the rates in 1928.

The evenly balanced declining and increasing annual GDP growth rates prior to 1929 have been replaced with continuous positive annual GDP's growth rates during the past 45 years. The great creditor nation status of 1929 has been substituted with a beggar man debtor bravado country wearing only the emperor's new clothes. Its treasury is writing bad checks against future income that can only be guaranteed if the remaining 57 percent of the US private (nongovernmental) work force becomes governmentalized allowing a Weimar type of hyperinflation. In short the consumer saturation point of 1929 looks very appealing against the very poor economic hand that America now holds. Consider America's current financial balance sheet and thereafter consider how badly the unbalanced excesses of 1929 unfolded.

In the next nine weeks, data - which has always been there - will be re-recognized. GM's and Ford's junk bond status and their probability of default on a collective 450 billion dollars of debt will reappear. The thousand mirrors that reflect a single dollar in the derivatives markets will have key reflecting glasses broken erasing the image in 925. The housing bubble, that is so historically remarkable in its uniqueness in that virtually all know it to be a bubble, will crack. The microcosm of forward consumption in the last two months of the American auto business will witness the expected necessary microcosm of historically poor follow-on monthly sales. Major airlines will throw in the towel declaring bankruptcy and pension amnesty. Declining monthly GDP will receive attention. The real position of the individual debtor and the debtor country in the face of declining asset valuations and projected tax revenues will get its due. Fiscally impossible city and state governmental pension funds whose futures are tied to the equity markets and escalating real estate property values will have a viability reality check. For the first time in many years the concept of consumer retrenchment will be seriously and widely explored as a probable scenario.

The comparative initiating decay fractals at the secondary summit, with respect to March 2000, of US equity indices suggest a very remarkable primary revaluation. Watch the general trend and descent of the long term US note and bond debt markets as exiting money from equities and commodities flows into these long term debt instruments driving their interest rates lower. Gold has potentially only one more week before completing its maximal 12/30/30 weekly growth cycle with an abrupt devaluation. Opposite to gold, the dollar will transiently trend well. Expect the unexpected. Within this quantum fractal decay process, expect nonlinearity. Gary Lammert http://www.economicfractalist.com/ "

[SW]

Bullshit. Remember the surprise recently when it was discovered that China imported less oil than anticipated? Well, they did so for strategic reasons. They still have a centrally controlled economy. They still get to decide how much oil they are going to import regardless of what the internal demand is. If China had imported enough oil to satisfy their internal demand, we would be looking at $80 oil now not $65 oil. The margins are that tight. They simply decided to take the risk with internal discontent rather than tank the world economy and destroy their exports. They miscalculated and the bite was worse than they thought it was going to be. This means that they are going to have to increase their imports next quarter and that means that the EIA is going to have to scratch the good news they thought was coming out of China.

[nate]

http://uk.biz.yahoo.com/17082005/323/china-s-gov-t-squares-with-state-oil-companies-gasoline-prices.html

http://money.cnn.com/pf/features/lists/global_gasprices/price.html

http://english.people.com.cn/200411/01/eng20041101_162328.html

oil prices in china have been artificially low for years? not only did the chinese not tax gasoline like some countries do, the chinese may have subsidized gasoline. the price in china may have been heavily influenced by a centralized planning authority and not by broad-based markets. an economic shock might happen if oil and gas is a market-based price in China.

[bonbon]

Strange and surprising, shortage in the society with fixed prices, as opposed to $3/gallon here (as in, close to minimum salary - work to be able to get to work and be proud to live in US). A really interesting aspect is Chinese companies selling gas abroad rather than domestically to avoid the price controls. Capitalism in motion.

[Mark Thoma]

anne's analysis is a lot better than the editorial in today's WSJ. It appears bashing Carter is more important than producing an accurate analysis of the reasons for the controls and the difficulties faced going forward. Here's what the WSJ says in its analysis:

"We don't know if the Chinese have suddenly appointed Jimmy Carter as their energy czar ... The government has imposed price controls on oil and gas in an effort to fight inflation, just as the U.S. did back then, and in the last few weeks it has even resurrected another Carter-era gem..."

Here's anne's take from comments:

"China's planners will continue to try to insulate farmers against increases in fuel prices, so the problems of Chinese shortages at current international energy prices will not be easily resolved. But, China's planners have been fairly adept at handling tight allocation problems for the past decade.

The effects of high energy prices are changing production and consumption patterns in an important number of developing countries, and I wish more attention were being given the changes."

And elsewhere anne says

...Thinking through the problem yet again, we have a serious issue for China's economic policy makers. Planners have continually been able to get around allocation problems, but this is trickier for the many points of potential blocks than managing road and rail traffic as new ties are constructed. Still, I would not underestimate China's planners just now....

The WSJ should hire anne.

[trevelyan]

A June article from a Chinese oil-tracking website suggests that oil demand domestically grew 20% in 2004, with automobile use responsible for 52% of the jump. Power generators and the aviation industry are allegedly responsible for 13% and 10% of growth as well.

http://www.oillink.com.cn/wzdt/dshow1.asp?id=30

I don't know if this makes the reserve-holding argument less plausible. But it may be worth noting that there is a massive ethanol-fuel project in northern China which may be helping to mitigate demand there, and fostering a regional imbalance in automobile-driven oil demand that make shortages hit the south harder than other regions.

[anne]

Dear Mark,

Thank you :)

[nate]

What would you think if the U.S. subsidized the cost of gasoline? Would this be good policy? Would this cause distortions? Could it be sustained indefinitely? At what cost?

A lot of people already think gasoline should be taxed more than it is in the U.S.

The WSJ has some problems these days. Some of the problems are shared by all newspapers, and some are more specific to the WSJ. Generally, the WSJ recently has lost its "point of difference" and sounds like a trumpet for the U.S. Congress and presidency. The WSJ also picks up on stuff that was new 20-30 years ago and acts like it is new and avante gard today.

I did not read today's editorial in the WSJ.

[nate]

one more on the WSJ: although circulation may be down slightly, it may not be down as much as other newspapers.

rumors are it the WSJ may be for sale in the future. Buyers might be the NYT, GE, Gannett (USA Today), or others.

[anne]

Reading through a survey of African press articles, there is increasing reason to be concerned about the cost of energy in developing countries.

A work station screen was set up, with 4 windows. The article spacing in a window seemed fine till I posted. So much for windows, back to an archaic full screen :)

[pat]

Is gasoline price in China really subsidized, or is it just taxed less? Gas in Shanghai is currently 4.28 yuan per liter. How is this compared with the US before-tax price? Does anyone happen to know?

If I have to guess, I will put more weight on the arbitrage between HK and Guangdong prices/taxes pointed out by DOR as the main reason of the gas shortage in Guangdong, as no such shortage is reported in Shanghai.

[anne]

1 dollar = 8.1047 Yuan

1 liter = 0.26417 gallons

That would be 1.395 dollars for a gallon of gasoline in Shanghai. [Done with no net :)]

[anne]

Remind me to learn to type correctly:

1 dollar = 8.1047 Yuan

1 liter = 0.26417 gallons

Shanghai price 4.28 Yuan for a liter of gasoline.

That would be about 1.995 dollars for a gallon of gasoline in Shanghai.

[anne]

http://www.nytimes.com/2005/04/19/business/worldbusiness/19energy.html?ex=1124942400&en=7d3c17ed58675f16&ei=5070&emc=eta1

April 19, 2005

GUANGZHOU, China

The Chinese government raised the regulated retail price of gasoline by 7 percent on March 23, to $1.66 a gallon. But it left diesel unchanged at $1.57 a gallon to avoid antagonizing farmers, who need a lot of diesel in their tractors for spring planting.

[Then the price of gasoline has been allowed to rise from $1.66 to $2.00 since March 23.]

[pat]

Thanks anne! I'll save your post for future reference. I can't never get the gallon/litre conversion right, ever since some Canadian friends told me that American gallon is different from English gallon and my dictionary had the wrong gallon.

[pat]

"can't" should be "can" in the previous post.

[anne]

Pat, this is quite an intriguing problem and I am going to survey Chinese papers to gain a sense of how it is to be handled.

[nate]

I am curious how much a typical chinese farmer burns in fuel to plant and to harvest, and how much in total this is. then i would be interested in comparing this to commuting to work in a U.S. major metro area in a Yukon, Expedition, Excursion or Hummer. also, how many people commute by themselves in an SUV in the U.S.?

Also, if China is subsidizing energy, which it looks like they may be doing, would this have the effect of lowering manufacturing expenses in China? it also might dull the incentive for companies to invest in new capacity for oil. (not sure)

just curious: anyone know of an existing comparison of gas, oil and payroll taxes: China to U.S.?