Ordinarily, an increase in the price of gasoline would not be news. But in China, it is. Gas and diesel prices went up 18 percent overnight. Here’s why that’s important.
China sets domestic energy prices. Gas, diesel, jet fuel and electricity are all carefully controlled.
The last time Beijing allowed gas prices to rise was in November. Since then, crude oil prices on the world market have climbed about 40 percent. Until earlier this week, Chinese consumers were paying about $2.60 per gallon for 90 octane gasoline, while consumers in the U.S. have been paying upwards of $4.00 a gallon.
Every time I filled up the office car, I’d think: Thank you, China! You’ve just given me a rebate of $1.40 a gallon. Merry Christmas to you, too!
Obviously, that subsidy was unsustainable. The two major oil refiners that retail gasoline could not continue losing tens of millions of dollars.
The prevailing thinking, though, was that Beijing would bite the bullet and not raise gas prices till after the Olympic Games in August, desiring complete social stability before and during the Games. Also, it put off action in order not to aggravate rising inflation.
That thinking was wrong.
The price increase shows that other important factors came into play. Around Asia, other nations were pushing up subsidized prices, including India, Indonesia and Malaysia. China was coming under criticism that its artificially low prices were stimulating demand, forcing prices up further.
That is why oil markets plunged $4 or so with China’s announcement.
Also, shortages of gas were breaking out in southern China, a sign that refiners and retailers are weary of selling at a loss.
An analyst appearing now on CCTV 9, Tang Min of the China Development Research Foundation, is saying that he expects a second price hike soon and that the two hikes will stimulate the refiners to bring more gas to the market.
“If the companies lose less money, the more incentive to produce more,” Tang just said.
Social stability is still a major concern, of course. Another headline this morning notes the continuing drop in Shanghai stock market, which is affecting tens of millions of small investors. The main index plunged 6.5 percent yesterday, dropping to 2,748, less than half of what it was last Oct. 16 when it hit a record 6,124.
The big question is what impact the hikes will have on inflation. The Consumer Price Index fell to 7.7 percent year-on-year in May, a dip from April’s 8.5 percent, giving officials breathing room to act. But could inflation soon hit double digits?
I think it already has. We went to a neighborhood restaurant last night, and I’m convinced the prices were at least 20 to 30 percent higher than the last time I was there a couple of months ago.