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Thursday, August 18, 2005

Price Controls on Fuel in China

Back to economic principles.  If a price ceiling is imposed, what should happen?  Shortages?  Price controls on fuel in China discussed in the following two articles, one from last spring and one from yesterday, are a case in point:

The Great Engine of China Is Low on Fuel, by Keith Bradsher, NY Times:  April 15 - 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. ... 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. … China has embarked on a binge of construction of new power plants, many of them coal-fired. These are already starting to make blackouts less common elsewhere in China and hold the promise of eventually letting the electricity supply catch up with demand … Diesel generators have become a necessity for factories across much of China in the last few years, as electricity demand has soared past supply, and they have helped turn China into the world's second-largest oil importer, after the United States. …

Fuel Shortages Put Pressure on Price Controls in China, by Keith Bradsher, NY 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 at service stations and have disrupted some freight shipments, as trucks do not have the diesel to make trips. Some in China and abroad say the state oil companies created the shortages to increase prices. … Sam Dale, an Asian oil analyst in Singapore with Energy Intelligence … said oil companies appeared to be putting pressure on the Chinese government to free retail prices, by running their refineries below capacity and holding back supplies from the market. "It's an artificial shortage," he said. … Mr. Jia said Sinopec service stations would be fully stocked by Thursday in cities near here that have been experiencing shortages. 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. Sinopec's closest domestic rival in refining, PetroChina, is more active in Northern China. PetroChina officials had no comment on Wednesday.

The low fuel prices, which have helped to fuel China’s economic growth, are not sustainable, and China cannot build power plants fast enough to satisfy the excess demand at current controlled prices. It will be interesting to see how China’s competitiveness is affected when firms are forced to absorb the full cost (or more of the cost) of energy inputs into production decisions.

[Thanks anne!]

    Posted by on Thursday, August 18, 2005 at 09:00 AM in China, Economics | Permalink  TrackBack (2)  Comments (5)


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