Chinese Government Having Trouble Getting Fuel Prices Right

Michael Giberson

From the Financial Times beyondbric blog, some somewhat puzzling news from China about how the government’s decision to raise gasoline prices was leading to long lines at gasoline stations.

In Beijing on Tuesday, long lines began to form around gas stations across the city. It was one of the first tangible signs of the government’s decision to raise fuel prices, which went into effect Tuesday at midnight.

So people were lining up to pay a higher price? That doesn’t make much sense. The link in the quote was in the source post – it goes to a Chinese TV news report – and maybe it provides a little more insight on the link between price increases and gasoline lines (at least it might if you understand Chinese).

The rest of the FT beyondbric story conveys a more normal sort of relationship between government-managed pricing and market commodities:

The price hike is a belated bid by the government to bring fuel prices closer in line with global markets, as crude prices this year have risen. Officially, China adjusts fuel prices in step with the international price of crude. But analysts say that today’s increase is smaller than would have been dictated by global markets because of inflationary fears. An official from the National Reform and Development Commission, which governs prices, was careful to point out that the fuel price hike will have minimal impact on the CPI numbers.

The new prices will make life a bit easier for China’s refiners and distributors—who sometimes have to sell at a loss when prices get out of joint. But it’s unlikely to address another key issue that’s been plaguing Chinese drivers across the country: diesel shortage.

In Chongqing, truck drivers are lining up for three to four hours to fill their tanks with Diesel, according to coverage from state media CCTV. In central Henan province, the government has sternly ordered state-owned oil companies to provide diesel to gas stations, which local media compare to giving blood. The city of Chengdu has made special arrangement to secure diesel supplies, but private gas stations there are still not selling the fuel.

There are two reasons for the diesel drought. Demand for the fuel has soared in the last several months, as businesses and individuals use diesel-powered generators to supply themselves with electricity. Power cuts across the country have been widespread as part of the government push to reduce electricity consumption.

Since the retail price of diesel is set by the state, this sudden surge in demand wasn’t passed on to higher prices. Instead wholesalers, betting on future price hikes, started storing diesel instead of selling it. Meanwhile diesel’s wholesale price, which is less tightly controlled by the state, started to soar and soon exceeded the retail price—so many gas stations could only sell diesel at a loss.

Wednesday’s price hike will help alleviate the imbalance but is unlikely to fully resolve the problem. There is also a basic shortage of supply: China’s diesel imports have soared and the country has announced a ban on diesel exports next year, according to reports. Those truck drivers in Chongqing may have to wait in line a while longer.

Maybe those lines as a result of a price increase do make sense. Perhaps before the price hike retailers couldn’t get gasoline to sale at all, and now a least a little is flowing. Drivers are lining up to get what they can, while it is available, and perhaps before prices rise again.

And note some of the subtler consequences of trying to manage the economy in ways that are supposed to help the central government look good. In order to keep the CPI numbers from looking bad – not necessarily keeping actual inflation down, just keeping measured inflation down – the government is imposing the un-measured cost of waiting in lines for supplies or doing without.

In order to reduce measured electricity consumption the government cuts power, leading Chinese consumers to switch to diesel-powered generators which won’t be counted. Of course diesel generators likely produce more harmful emissions per kwh of electricity produced and some consumer may switch to other sources for light, cooking and heating. It isn’t clear whether net emissions rise or fall overall, but officially reported energy consumption will look a little lower.

The “power cuts across the country” link (also from the source) provides more background on this second point:

Beijing has set an ambitious target to reduce the intensity of energy use in China…

Now, after months of similar extreme power cuts, Beijing’s bureaucrats are able to breathe a sigh of relief: it looks like China is back on track to meet the goal of reducing energy use per unit of gross domestic product by 20 per cent from where it was five years ago.

That was the word from a top climate change official, Xie Zhenhua, who said China has seen a three per cent reduction in energy intensity during the first three quarters of 2010. […]

Wednesday’s announcement was the first concrete signal that the extreme measures adopted this autumn are paying off. In some counties, the planned power outages have cut into the balance sheets of local businesses and prompted local business owners to protest. Across the country, the rush to buy diesel generators to fuel factories and businesses through the power cuts has sparked a diesel shortage and sent generator prices up. […]

In the first six months of this year, China’s energy intensity actually increased by 0.09 per cent, reversing the trend of the previous four years and throwing energy officials into a panic.