Thursday, May 29, 2008

China's Cheap Gasoline

Donald Straszheim has a fascinating article about oil prices in China on the Forbes website. Here is what he reports:

Consider the following: Since January 2007, global crude oil prices have risen by 109%; gasoline prices in the U.S. have risen by 77% (roughly apace); gasoline prices in China have risen only 9%.

Gasoline in the U.S. now sells for around $4 per gallon, but it sells for $2.49 per gallon in China. Beijing last raised domestic gasoline prices in November 2007, by 9%, and that was the first and only hike since January 2007, when crude was $87 per barrel.

Given this information, we clearly can see that artificial price controls have driven the voracious demand for oil within China. Is it sustainable though? Straszheim estimates that the Chinese government is providing $40 billion per year in subsidies to maintain cheap gasoline throughout the nation. The Chinese government is in a bit of a quandary though. Inflation has hit 8% in China, and if the government lifts the price controls on gasoline, it will rise substantially - moving well into double digits perhaps. How will the Chinese economic growth engine be affected if inflation gets uncomfortably higher? Meanwhile, we have to remember that China is the second biggest consumer of oil in the world. If prices rise substantially, how much will that curtail demand in that nation? A correction in the Chinese domestic market could stem the rapid increase in the global price of oil that we have been experiencing.

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