Chinese energy prices

The Chinese government announced on June 19, 2008 that it will boost retail prices for gasoline, diesel and electricity.

China is the world’s second-largest oil consumer, after the U.S. With the sharp run-up in oil in recent month, Beijing’s longstanding policy of fixing retail prices for gasoline, diesel and electricity has been widely criticised.

The logic behind the criticism of that policy is straightforward: By keeping down the prices that its companies and consumers pay for fuel, China is impending the normal market mechanisms that would cause demand to soften as global prices soar.

Another effect of China’s price controls has been to make it unprofitable for Chinese refiners to make gasoline and diesel, since they have to buy crude oil at global prices but sell their products at controlled local prices. Those producers have been pulling back from the market, creating widespread fuel shortages.

Similarly, power plants’ losses have been mounting as they burn coal bought at market prices to sell electricity at a low state-set price, and power shortages have been spreading.

But because of that unsatisfied demand, the increase in price should actually cause a surge in oil use that could exacerbate price gains in the near term.

The Chinese government also indicated that will not dismantle the system of government-set prices but will seek to change it. With the country facing the highest inflation in more than a decade – more than 8% since this year – officials seem unwilling to expose Chinese consumers to the full brunt of global oil price swings.

Source: WSJ, 20-22/06/08