Everyone knows that China has been under pressure for years, led by the US Congress, to allow the value of its currency, the RMB or yuan, to appreciate. But the “weak” RMB that hurts American exporters is not likely to be the main issue of concern to American voters. They’ll be more worried about $4/gallon (or higher!) gasoline. And this (Chinese article) is a big reason why. China has price controls on diesel and other fuels, such that there is now an RMB6000 (US$870) disparity between what a ton of diesel goes for in China and what it goes for abroad. Chinese oil refiners like Sinopec are getting slammed, since their costs are rising but the sale price of fuel is controlled by the Chinese government. The government is responding with measures to import more oil to help ease pressures.
Why does China control prices? Well, it’s obviously a good way to spur growth, and it’s been working as the country has been growing at 10%+ for over a decade. It’s also a way to over pollute the country and congest the roads. And it’s contributing to the skyrocketing oil prices worldwide, since 25% of the world’s population, the Chinese, are paying a lot less for the oil they use than everyone else.
SHTig adds (5/28 6:50pm PRC time): Mul called to ask what this means, and nator commented below also asking for clarity. To answer – yes, China buys oil on world markets at prevailing prices. But then, when that oil is sold domestically it is done so at a price lower than the prevailing world price. The government forces Sinopec and others to sell it on the cheap, and makes up for this by subsidizing Sinopec with the difference. This process allows everyone in China to get oil in all forms for less than the ‘true’ price, which results in more oil being consumed in China than what should be. We expect consumption to be inversely proportional to price – and when prices are kept artificially low, consumption is artificially high. With oil consumption artificially high in China, China demands more oil from the world markets than it should from an economic prospective and this is what adds to the upward pricing pressure on oil.
If your taxi driver had to pay the prevailing market price for gasoline, your taxi flagfall would be higher than RMB 11 (as it is in Shanghai), and you’d pay more per kilometer. The ride might cost you 50% or 100% more, and at the margins, some people would opt to take a bus instead. Multiply this behavior by 1,300,000,000 and remember that China is the world’s workshop, and we’re talking about a lot less oil being used, if only they – the end users – paid the prevailing price. That would reduce global demand and thus the price of oil as well, ceteris paribus.
Wonder if John McCain and Barack Obama will talk about this when asked what they plan to do about $4/gallon gasoline? If Chinese consumers paid the same price for fuel as everyone else, it might serve to put them on the same competitive playing field as other countries, and it might also serve to increase efficiencies within China.