Price Control for Oil in China

HK Standard has a good coverage on the price control for oil in China. As China is making its transition through gradualism ("stone by stone"), it is about time to stop subsidizing oil users. Same for energy (electricity), water, etc.

Without the force of the market, waste or inappropriate allocation of resources are inevitable consequences. I heard that 30%-70% of the water were not accounted for (stolen or wasted) in many Chinese cities. An inefficient and unstable energy supply (and price mismatch between diesel and electricity) also has led to redundant investment in diesel generators for some factories since mid-1990s.

Gasoline prices in China have been about the same level as in US, but become lower recently as they have not kept up with the international market trend. Here is a snapshot for comparison:

• The gasoline prices are RMB4.14-4.62/liter in a middle tier city like Chongqing on Jul23 (after the RMB revaluation), for RON 90-97 (Research Octane Number, corresponding to Pump Octane Number PON 87-93 in US); Using conversion factors of 1Gallon=3.785L and 1USD=8.11RMB, the gasoline prices translate into USD1.93-2.16/Gallon
• According to eia.doe.gov, average price in US is US$2.289/Gallon on July 25th
• If we factor in the un-tradable cost in operating a retail gas station, we could say the prices are pretty much the same in these two countries
• The lack of competition should mean higher retail price and less efficient operation, which might have annihilate any cost gap in labor and rent costs
• This means China, being a country of much less access to oil fields domestically and internationally and one that car travel is not a survival essential as in US, is as generous as US in oil tax/etc. It surely has one of the lowest price for oil for a net importer.

China may have its reason to maintain a stable price for energy. But reportedly one of the reason is for fear of hurting the auto industry (see also a previous post on a related topic). The problem of putting too much priority on the auto industry is, e.g., R&D in fuel economy will not received the right proportion of attention, hence China's auto industry may not be as competitive in markets outside US/OPEC, including China itself when local gasoline prices move up eventually.

There are some alternatives in which one can smooth out short term price fluctuation while keeping prices in pace with the market. For instance, one can use the 30-day (or other length of time, the shorter the better) average to set the price, which is possible if China maintains an inventory equivalent to more than 30 day oil consumption. (In fact, that is what China is doing today, without the inventory stock) China's recent effort in building inventory in Zhejiang will pave the way for such reform. However, this is still a distortion of market behaviors.