Streetwise Professor

November 1, 2007

Talk About Timing

Filed under: Economics,Energy — The Professor @ 11:13 am

Yesterday I blogged about Chinese price controls on oil, and said that I wasn’t aware of any evidence of shortages/rationing, and hadn’t observed any lines, etc., on my trip to Beijing. Today’s WSJ provides that evidence:

Scarcities of diesel fuel are being reported in regions throughout China, forcing truckers to line up for supplies. The severity of the problem was further underscored by shortages in the capital of Beijing, which is traditionally kept well supplied. Several gas-station managers in the city’s suburbs said they had run out of some types of diesel and were rationing others.

Officials say the situation could worsen if not quickly resolved. A man was killed by another customer Tuesday morning after jumping a line to buy gasoline in the Henan Province city of Xinyang, local police said.

But, the article also notes that the Chinese government has heavily subsidized refiners: “China has given the country’s biggest refiner, China Petroleum & Chemical Corp., known as Sinopec, big subsidies at the end of the past two years to offset its losses.” The article also states: “Because of its special role in keeping China’s tanks full, Sinopec has been basically forced by the government to make up for any shortfalls. But some big players are suffering, too. Earlier in the week, Sinopec said it was under ‘tremendous’ pressure from the rising prices. ‘We will try the best to ensure a stable supply of fuel in the market, but it’s a big challenge for us,’ Sinopec’s chief financial officer, Dai Houliang, told reporters Monday.”

The article therefore suggests–though doesn’t make it completely clear–that there are price controls (which encourage consumption) but that through subsidies and compulsion (“Sinopec has been basically forced by the government to make up for any shortfalls”) Chinese refiners have supplied more fuel than they would like at the low controlled prices. They haven’t supplied quite enough to meet the entire demand at the artificially low prices, however, hence the lines/shortages.

Price controls, compulsion, and subsidies have different implications for the demand for crude. Depending on how China adjusts each of these policy instruments, the raising of the price ceilings could ease some pressure on the demand for oil.

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