A couple of months ago several taxi drivers warned me about “trouble brewing” between the oil refiners and the government:

“How come you’re so clued-up about the machinations of the big oil refiners?” I asked one Cantonese driver. “Because any rise in the petrol prices might mean that I can’t pay the rent for my family’s apartment” He replied. Good answer I thought.

One particularly colourful taxi driver recently raged at the hypocracy of the “powers that be” in China:

“The so-called principles of the big oil companies change as often as the weather. If international crude prices crashed down to US$10 a barrel they’d slip on their red hats and become hard-nosed socialists all praising the planned socialist economy and how domestic oil prices must be maintained artificially high ‘for national stability’. Now however, after making a killing for years, they complain about that same planned economy that feathered their nests for such a long time isn’t to their taste. If the government suddenly let the oil refiners raise prices how many people would suffer? The government must get its economic house in order before allowing the oil companies a free reign”.

Fair point.

August 23, 2005 @ 1:12 am | Comment

On the other hand, as the free marketeers will point out, gas will be rationed to supply one way or another. If it isn’t rationed by price (in other words, raising it to reflect scarcity), it will be rationed by shortage as it is sold off into higher paying markets. China could always nationalize its oil firms. Oh…wait…

August 23, 2005 @ 1:29 am | Comment

ooops, I thought Martyn’s comment was so great that I made it part of the post. Oh well…I didn’t move fast enough.

August 23, 2005 @ 1:30 am | Comment

Incredible.
Without having heard about any of this, in today’s class we spoke about the possibility of such things occuring in a country where prices are kept artificially low to prevent unrest while businesses and companies (and taxi drivers) are left to foot the bill.

August 23, 2005 @ 1:54 am | Comment

this is pure trouble. how will i get to work in the morning? i might have to take a bus with the unwashed masses. or worse…buy a car. ugggg!

August 23, 2005 @ 2:13 am | Comment

When I lived in Bangkok in 2004, I saw that Thaksin (the first decent PM that Thailand has had since the WWII) also kept a lid on domestic petrol prices for most of that year. In effect, allowing the Thai govt (taxpayer) to fill the shortfall between high international crude prices and low domestic prices.

Obviously Thaksin assumed that the internaional oil spike would be temporary. However this policy had to be eventually abandoned as it was bankcrupting the govt!

Thailand has a population roughly the size of Britain (60 million) so imagine what price the Chinese govt (and the state-owned refineries) are paying to keep the price of oil affordable.

On an additional note, it isn’t only taxi drivers (always a very volitile lot), haulage companies and private car-owners that benefit from the cheap petrol—it’s also benificial to the industries keeping the economy moving forward.

In other words, if international oil prices keep rising (and, at the moment, they show no signs of levelling out yet) China is going to start hurting very badly indeed.

August 23, 2005 @ 2:15 am | Comment

Very good post, Martyn. I was going to write this up on my blog, but you did it first, so I’m just going to steal it, OK? The shortage is still on in SZ, and it is causing trucking companies to lose out as well. Some of them are unable to haul for lack of fuel. Taxi drivers are NOT eager to pick me up, and the buses are packed to the rafters. My car is useless. What with the the constant rain, electricity outage, buses you can’t breathe on, a useless car, and too wet to ride the bike, I was about ready to leave last week.

No, chris, don’t buy a car. What will you run it on, your good looks?

I’ll bet that pricing policy changes soon, what do you think?

August 23, 2005 @ 2:55 am | Comment

P.S. I am very jealous of your ability to gossip with taxi drivers.

August 23, 2005 @ 2:56 am | Comment

Being able to gossip with taxi-drivers is a double-edged sword Sam mate. I’ll get back to you about the pricing policy changes in a bit because “Mr. TPD Guest Blogger” is being sent to the supermarket by his better-half. The shame of it…

August 23, 2005 @ 3:01 am | Comment

BTW, Sam, steal away. I’ll pop over to Shenzhen Ren in a bit to comment.

August 23, 2005 @ 3:07 am | Comment

Actually, it US consumers also benefit from Chinese petrol subsidies. A large relative percentage of petrol in China is used commercially (due to lower private auto ownership). A significant portion of that is consumed transporting export goods from manufacturer’s to ports. This keeps prices of exports artificially low by reducing shipping costs to below market rates. So, ironically, poor Chinese taxpayers are subsidizing middle class Americans shopping at Walmart.

August 23, 2005 @ 3:20 am | Comment

So, ironically, poor Chinese taxpayers are subsidizing middle class Americans shopping at Walmart.

Way to take care of your serfs, Uncle Hu! Actually, Conrad, China HAS to keep this and similar practices up, lest they crater the economy. Let factory workers make over $0.50 per hour, and there goes the export business!

August 23, 2005 @ 5:08 am | Comment

China’s Refinery Wars

Read The Peking Duck: Oil Wars for some interesting information on distortions in the Chinese economy caused by its – uh- “unique” way of doing business…

August 23, 2005 @ 5:19 am | Comment

Well, the last years should have shown everybody that it’s time to heavily invest in research on alternative sources of energy. Espacially for China this is crucial for future economic progress. With all the pollution that allready exisits I don’t see how further economic growth can be achieved without desasterous results for the environment.

August 23, 2005 @ 5:33 am | Comment

Instapundit just linked to this post. TPD is currently receiving a huge spike in hits.

August 23, 2005 @ 6:15 am | Comment

Martyn- This is an excellent and insightful post. I’ve coopted it a bit on my blog on Asian Security Issues, I hope you don’t mind. -zb

August 23, 2005 @ 6:58 am | Comment

Look, the fact of the matter is that “Market Distortions due to price controls” and “the real reason” are both one an the same. Due to the US government setting interest rates artificially low and other reasons (ever since the beginning of the Clinton admin) there are just too many dollars floating around. That leads to price increases.

Heck my lawn guy also refuses to work at the same prices as before because that would cause him to LOOSE MONEY with the increase in oil prices.

Can’t blame the Arabs either since we are treating our currency like we can just print up more and everyone will accept it at the same price structure. Wouldn’t that be great. Heck we wouldn’t have to work anymore, just have Uncle Sam print money and hand it out to US citizens, then we could buy everything from over seas.

Also this notion that China has to follow stupid policies in order to prevent their economy from collapsing annoys me. It’s the stupid policies that have put them in the bind and the longer they continue them the worse the havoc later. The only thing the bad policies do now is may the accounting seem correct, however when they have to pay inflated prices in the future to restock on inventory the books aren’t going to look so good. That”s the beauty of a fiat monetary standard.

August 23, 2005 @ 7:01 am | Comment

Also this notion that China has to follow stupid policies in order to prevent their economy from collapsing annoys me.

Well, I could have been more clear. They have to follow a stupid policy now in order to avoid, in the short term, the consequences of stupid policies they shouldn’t have used to begin with.

August 23, 2005 @ 7:07 am | Comment

Chris, taking public transportation is unwelcome not because we have to rub shoulders with the great unwashed, but because we have to build our lives around the jobs we can get to on the public tranport schedule, we have to deal with their time inefficiencies and complexities as well as the issues in our own lives, raising our stress levels, and living our lives by someone else’s schedule IS A HUGE TAX ON THE MOST PRECIOUS THING WE HAVE IN LIFE WHICH IS OUR TIME, YOU POMPOUS ASS!!!

^Yours, Tom P.

August 23, 2005 @ 7:22 am | Comment

Dry pumps, muscle, and market

I was writing up a thought-piece on the reasons for our local fuel shortage, and what it means for price controls and supply planning, but I found this fellow Martyn who’d already done it up nicely at The Peking Duck. It gives some great insight into …

August 23, 2005 @ 7:29 am | Comment

ZB – go for it mate. I just left a comment at Asia Security Review. (*Warning* for China residents—it’s a Blogspot site).

August 23, 2005 @ 7:47 am | Comment

Oriental Oil Imbroglio

While it may seem that the great dragon of China is able to shrug off the super-high oil prices that are percieved to be strangling everyone else, the truth is actually quite different: The chaos created by sudden fuel…

August 23, 2005 @ 8:46 am | Comment

Our government is “setting” interest rates artificially low?

Nonsense. The Fed can effect short term rates by its ability to massively buy or sell treasuries but longer rates are set by WORLD market forces. 10 year treasuries at 4.2% do not indicate the world feels our fiscal house is in disarray. I wouldn’t argue it couldn’t be better but, relative to the rest of the governments in the world?
We doing ok.

The Chinese, like everyone, everywhere have a choice; they can either let the market work (as politically unpleasant as that may be from time to time) or they can subsidize consumption.

If they don’t let gas prices rise with demand, they’ll simply bankrupt themselves and face a bigger crisis further down the road.

What will happen if the Chinese allow prices to rise naturally? Demand, of course, will fall. One of the reasons for the rapid rise in oil prices has been the artificially rapid high demand from China due to the price subsidies. When they end (and they must) the price of oil in the world will decline.

August 23, 2005 @ 8:55 am | Comment

did someone call me a pompous ass? what the hell?

August 23, 2005 @ 9:02 am | Comment

The idea that the oil companies are holding the market hostage is based on ignorance of basic economics. They lose money by selling gas below the price it costs to refine it and deliver it to the gas stations. Period. The problem of price controls is repeated over and over again throughout the world because politicians know so little of economics. See America in the 1970’s, California with energy from late 90’s through the early 2000’s, even Hawaii has just put price caps on wholesale gas prices.

Will you are right about rationing. The only thing is that higher prices have two benefits. One is there will be no shortage. Since the price is higher, demand is less. Secondly, only those who will use the gas efficiently will buy it. People who waste gas won’t buy it, or they’ll stop wasting it. So higher prices are better for the environment and the economy, and in the long run for lowering the price of oil. Interfering with the market is just a recipe for disaster.

August 23, 2005 @ 10:05 am | Comment

More on the Gas Shortages

Peking Duck has a link to an article on the gas shortages. I hope my students were paying attention when I taught them about the gas shortage in America in the 70’s. It was due to the very same policies that China has now- price ceilings. Europe…

August 23, 2005 @ 10:17 am | Comment

I think Chris was kidding, for the irony-impaired…

August 23, 2005 @ 10:27 am | Comment

The fundamental problem is that some people are going to jobs, working a full day, and when all is said and done, providing a net, negative effect on the PRC economy. They get paid for that net, negative effect and the money has to come from somewhere. This problem is entirely of the PRC government’s making and entirely within their capability to solve it. They lack the courage to do so because the distortive effects of their prior ‘solutions’ has wound up a spring so tightly that telling the truth and fixing the problem quickly would probably end very badly for those in power in a physical, personal way.

The system needs to be unwound, people should not be paid for, on net, destroying economic value. The cost of doing it slow is to continue to steal money from the vulnerable in society. The young, the old, the sick, all should have money set aside for them, whether out of the family budget, a private charity budget, a government budget or some combination but all societies do this. It’s part of our shared humanity. When that money goes to pay workers who are not creating value but doing the opposite, all pay and the ones who cannot defend their interests, the vulnerable, pay the most.

August 23, 2005 @ 10:43 am | Comment

I just want to respond to comments at “China Ate My Blog” re this post:

“The oil companies are not holding the market hostage. This is an ignorant idea that comes from people who do not understand economics.”

Anyone with half a brain cell knows that the root problem of the current oil supply crisis in Guangdong is not caused by the belligerent attitude of the Chinese oil refiners but, rather, the unfortunate economic policies of the Chinese government. The US also did something similar in the ’70’s.

However, moving swiftly from Economics 101 to Guangzhou, China, I used Guangzhou taxi drivers as an example of the effect any increase in petrol prices would have on the population.

For everyone’s information, a typical taxi driver China’s cities drives 12 hours per day, 7 days a week, all year round. For this, he/she recieves a take-home monthly salary of about 1,000 Yuan (about US$120).

At the moment, the taxi drivers, truckers, farmers etc etc of China, aren’t very interersted in hearing westerners explain economic principles to them while they worry about whether their family will eat next month. Remember, there’s no social security safety net in China.

As far as the Chinese Communist Party are concerned, any sudden rise in domestic oil prices will result in the above people feeling very, very pissed off indeed.

Answers on a postcard please.

August 23, 2005 @ 12:29 pm | Comment

The foreign policy implications ain’t pretty.

August 23, 2005 @ 3:25 pm | Comment

There’s a reason its called OPEC

If there’s anything to console a developing country these days, it’s the state of another developing country. Alan is getting mildly miffed about Russia’s prospects, but imagine returning to Indonesia to find that the country, a member of OPEC,…

August 23, 2005 @ 5:13 pm | Comment

there are too many stones in the river now

there are too many stones in the river now

August 23, 2005 @ 9:13 pm | Comment

Hey folks – when the Middle Kingdom’s problems finally balloon beyond what their beknighted masters can contain/correct, then the whole world, especially the US, should watch out.

They will be as a wounded serpent, and they will as likely as not lash out at a perceived enemy…the US…and they are a member of the Nuclear Club. It is defineitly worth trying to help them smooth the transition, if only to avoid having LA wiped off the map. On the other hand, that doesn’t sound like such a bad thing…

August 23, 2005 @ 9:44 pm | Comment

China’s oil price (ii) – and transition of SOE

The phenomenon in Guangdong showed that the oil oligarchs, although state owned, are rebelling by hoarding the gasoline. This is good evidence to rebuff China bashers in the CNOOC/Unocal incidence

August 24, 2005 @ 2:16 am | Comment

Your Doom Approaches

There is a very disturbing report about gas lines in China:

The chaos created by sudden fuel shortages…

August 24, 2005 @ 11:46 am | Comment

Jag,

The Fed controlling short term rates does effect long term ones. It’s just a coincidence that when the Fed dropped the rate to around 1% that long term rates followed. You do know about Freddy and Fanny’s shenanigans don’t you? They are leveraging the short term rates to drop the long term ones.

Of course there are other factors effecting the world economy that are causing dollars to have a larger market, and thus sucking the excess dollars up over the past decades, such as that Thacher/Reagan revolution opening world markets, along with nafta, and opening trade with china. Those tend to cause efficiencys that bring prices down.

Also don’t forget that the long term rate is so low because of government intervention on the part of Japan and China and not because of some free market adjustment. They have been buying up our notes. They can only do this so long before they bankrupt themselves.

There are other metrics that indicate we have set rates too low (yes short term, and that is short hand language). We have low savings, a big trade deficit, rising commodity prices (to be followed by rising consumer prices), a housing boom (bubble), inflation adjusted rates that are close to zero (if you don’t allow the BLS to use their fudge factors like hedonic pricing, good substitution, and owner equivalent rent). It is partially our fudging of the numbers that is suckering in the overseas money.

The stock bubble at the end of the 90’s was also a symptom of below market price levels on interest rates. It popped and now we are trying to reflate, which will ultimately end badly. Where there is smoke there is fire.

August 24, 2005 @ 11:19 pm | Comment

china econimic roundup (ix)

Brad Setser asks if Alan Greenspan is promoting moral hazard… in China.:Listen to one Chinese fund manager in this morning’s Wall Street Journal:Mr. Zhu (who helps manage US dollar investments for the Bank of China) expresses confidence in the US

August 25, 2005 @ 12:49 am | Comment

Scott over at the highly-entertaining site
http://www.amcgltd.com/ linked to this post but also provided an exceptionally good write-up of his own. I asked his permission to paste it here:

“While the author cites warring oil companies turning off the taps in a conspiracy to corner China’s burgeoning petroleum market, the actual reason is right there… price controls. This explains a lot about what’s going on in the oil markets right now. When prices go up, what’s supposed to happen is that demand goes down. In the market-driven economies of the west, that’s exactly what’s happening. This then results in a stabilization of prices, eventually leading to a reduction of price as things regain equilibrium.

But China’s throwing a wrench into the works. By instituting price controls, China has allowed demand to grow at a rate completely disconnected from the reality of oil supplies. High prices should cause factories, farm equipment, cars, and power plants to become more efficient just to stay in business, causing them to use less oil, stopping and then eventually reversing price hikes. But since the Chinese government is shielding its industries from this effect there is no incentive to improve, no reason to become more efficient. Wasteful tractors, inefficient power plants, and gas-guzzling cars are allowed to continue operating, even faster, because there’s no reason for them not to.

However, the “ain’t no such thing as a free lunch” principle is finally starting to take hold. Someone’s been left holding the bag on this, eating this price difference, and it would appear to be the oil companies. The inevitable result of any attempt to artificially control prices is a shortage, and now that these oil companies have cut off the taps all sorts of hell may start breaking loose. Because you see most people don’t understand why market forces, even ones that seem to hurt people, are a long-term good. They instead focus on the short-term evil of shortages, long lines at gas stations, brown-outs at home, and crops left to rot in fields because there’s no fuel for the tractor.

These are the times when democracy shines, and therein lies a deep and perhaps insoluble problem for the current Chinese government. When western nations tried to have it both ways by controlling oil prices in the face of real scarcity back in the 1970s, the resulting economic chaos simply caused voters to boot out the engineers of the disaster and bring in others who could fix it. In some places these fixers were then booted out in turn*, but there was no social revolution, no dismantling of an entire country, no civil wars.

China doesn’t have this safety valve. Worse still, the communist party leadership has made the common error of assuming it is the country, and therefore its leaders cannot get their heads around China existing without them. If they can’t get ahead of this oil crisis, and quickly, Very Bad Things will start to happen. If they can’t get the oil companies to play ball, economic collapse is right around the corner. If they can’t get the populace to accept higher prices, social revolution is right behind it.

And therein lies the rub… it seems clear the populace won’t accept higher prices, and China’s Byzantine bureaucracy and endemic corruption mean their oil companies may not have to play ball. And even if they do, oil prices aren’t going to drop just because the Chinese government wants them to, so getting the oil companies to come around will merely delay the crisis, not avert it. When irresistible forces start flitting around immovable objects, reality has a way of clubbing those who refuse to see. If the Chinese government doesn’t do something to reign in demand, I’m expecting that club to hit them right between the eyes.

I’ve often said we’re sitting on an oil price bubble that merely needs a pinprick to burst. China’s economy collapsing into a heap would fit the bill nicely. Unfortunately their governmental structures are so rigid and inflexible, social revolution would almost inevitably follow. Considering China holds an enormous amount of the US’s debt, this would definitely cause “interesting times” for just about everyone.”

August 25, 2005 @ 4:19 am | Comment

Thanks very much for that Scott, it’s much appreciated. Please let us know if you write any more China-related posts.

August 25, 2005 @ 4:21 am | Comment

The Real Oil Rivalry: China vs. India

August 25, 2005 @ 7:00 pm | Comment

Martyn:
“These are the times when democracy shines”
vs.
“it seems clear the populace won’t accept higher prices”

Discuss.

August 27, 2005 @ 5:27 am | Comment

Michael, do you mean democracy re the people’s wish not to see higher domestic oil prices? You’ll need to expand a little I’m afraid.

The critical issue here is that the Chinese govt have a choice: either keep paying the shortfall between the international and domestic oil prices (and I doubt that can can afford to do do) or allow domestic petrol prices to rise thus incurring the wrath of those sections of Chinese society that will be directly effected by the increase.

Imagine the CCP to be like a load of little fire engines driving around the country putting out the fires of social unrest. At the moment they can keep a lid on it because the unrest is isolated all over the country.

The last thing Beijing wants (and its greatest fear) is that the tinderbox that is China 2005 should be set alight by nationwide protests in which all other disseffeted sections of soceity join in.

Therefore, the option the CCP have is to very, very slowly allow domestic petrol prices to rise whilst keeping the People’s Armed Police on Red Alert.

This is the only way forward that I can see. International oil prices continue to climb and show no signs of abating. However, Chinese society is addicted to cheap petrol like a long-term heroin addict.

The only option is a long, painful and potentially explosive weaning off the cheap oil.

August 28, 2005 @ 4:25 am | Comment

By the way, China has never experienced any kind of “shock therapy” in its transition to free market capitalism. The same “shock theapy” that was so highly successful in Eastern Europe and perhaps less successful in post-Soviet Russia.

The answer is easy: i.e. allow the market to rule but the means to that end are far from simple, especially for the paranoid CCP and their quest to continue their rule over China.

August 28, 2005 @ 4:30 am | Comment

Fuel shortages, in China

You think we are having problems with gasoline supplies? Just be glad government agencies aren’t running the oil business!

If there is anything worse than several competing giant faceless corporations, it is a single giant faceless corporation with …

August 28, 2005 @ 9:09 pm | Comment

Thank you for the info!

September 16, 2005 @ 9:33 am | Comment