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Bashing China for High Oil Prices
After bashing ‘speculators’ for high oil prices the New York Times and the Washington Post have today found the real culprits: Fuel subsidizing developing countries, especially China.
The NYT headlines: Fuel Subsidies Overseas Take a Toll on U.S.
From Mexico to India to China, governments fearful of inflation and street protests are heavily subsidizing energy prices, particularly for diesel fuel. But the subsidies — estimated at $40 billion this year in China alone — are also removing much of the incentive to conserve fuel.
WaPo titles: China’s Cars, Accelerating A Global Demand for Fuel
In the meantime, gas has been kept artificially cheap. Even after subsidies were partly lifted last month, a gallon of gas in China costs only $3.40, well below market prices.
How much of this is real?
Are $3.40 per gallon "well below market prices"? Via Wikipedia
According to http://www.gasbuddy.com, on June 9, 2008 gasoline prices in the United States were US$1.07/litre (US$4.06/US gallon).
…
According to national figures from the US Department of Energy, in March 2007 52% of the cost of gasoline went to pay for crude oil, 24% for refining, 15% to taxes, and 9% for distribution and marketing. By April 2008, these had changed to 72.7% for crude oil, 10% for refining, 11% to taxes, and 6% for distribution and marketing.
Subtract 11% from $4.06 and you get $3.61 per gallon as U.S. retail price without tax. Thereby China’s gasoline prices are only 5.4% lower than prices in the U.S. Such a difference could well be explained by other issues than subsidies. The expression "well below market prices" is certainly not justified.
The alleged $40 billion subsidy the NYT is guestimating is also weird. In 2006 China consumed 7.3 million barrels per day. As that has since then increased let’s calculate with 8 million b/d. That would be 2,920 million barrels per year or 90,520 million gallons per year. $40 billion of subsidizes are then $0.44 per consumed gallon. Add that to China gas price of 3.40/gallon and it will be at $3.83/gallon, i.e. higher than the U.S. price without taxes.
China has taken the decision to redistribute money it taxes from its people via a 11% subsidy to gas prices. That may not be smart policy but it amounts to as little as $0.085 per day and inhabitant. It has little to do with the general increase in oil prices.
The U.S. subsidizes food for its people with $9 billion per year. That are $0.082 per day and inhabitant. Will the WaPo and NYT now write big pieces on how farm subsidies in the U.S. are increasing world food prices?
More on “bashing”:
I agree that these attempts to blame the U.S. gasoline price troubles on China’s subsidies are ludicrous. However, there is no doubt in my mind that fuel subsidies fuel growth (pardon the pun) and that this desired growth might be a positive thing, especially for populations of 3rd world nations, at least in the short term. Subsidies certainly do more than keep people from rioting.
I find value in these articles and the MOA readers must know by now that I am not a fan of the NY Times or the Washington Post. However, I find it curious that both articles, so similar in nature, came out on the same date, one from Songjiang, China, and the other from Jakarta, Indonesia.
b: Subtract 11% from $4.06 and you get $3.61 per gallon as U.S. retail price without tax.
Why subtract the tax? The end price is the factor in determining demand. Whether the price is high from tax or low from a subsidy, demand is affected by price in both the U.S. and China. Moreover, the U.S. price (less the taxes) of gasoline is not a standard for a global market price of anything.
b: ”In 2006 China consumed 7.3 million barrels per day. As that has since then increased let’s calculate with 8 million b/d.”
Well, you can calculate assuming a 700,000 barrels per day increase over two years which is quite significant, but I could easily assume double that increase, especially after reading that China’s oil imports posted double-digit growth in the first five months of 2008 alone.
Although this statistic from the IEA is closer to your estimate:
China should see demand increase 5.6 percent in 2008 compared with 2007 and at a roughly similar pace in 2009.
And perhaps $40 billion is not significant in China where, on a per person basis, one is talking mere dollars. But all this detail in statistics means little. The most important fact is that both China and the U.S. are HUGE importers of oil, and with such volume, even a slight difference in demand means a HUGE difference in barrels per day. If one was just discussing a small country like Haiti then I would be in agreement, but as the article points out, strong growth is happening in many countries, large and small countries alike. Quite simply, is oil the best way for growth?
Somewhat relevant to this discussion, and should at least be noted, is that oil has many uses besides gasoline. It is not always refined into gasoline and the articles referenced in the NY Times points out specifically diesel fuel subsidies (typically #2 Fuel Oil), and kerosene and jet fuel subsidies (typically #1 fuel oil and better).
Here is just one other example found in today’s news:
Fuel oil shipments look set to be squeezed worldwide, as over 7.354 million barrels per day (bpd) of new secondary unit capacities come online in the next five years, International Energy Agency (IEA) data show.
“Globally, if you go by the announced plans for refinery build up, you’ll find that the world will move into an increasing net deficit of fuel oil,” said Alexis Aik, a senior consultant at FACTS Global Energy Group.
And I find the comparison made with oil subsidies to food subsidies to be very strained.
b: ”The U.S. subsidizes food for its people with $9 billion per year.”
The linked article talks about agricultural subsidies, not food subsidies to the general population. Most people in the U.S. are not farmers or food producers. However, as food consumers, food stamps are a form of subsidies but this would not necessarily keep U.S. food retail market prices low. In addition, the U.S. produces a greater percentage of food value for internal consumption when comparing values to the import/export ratios of crude oil. But often U.S. agricultural subsidies are given to farmers to NOT grow food. I find that crazy, similar in craziness to what the NY Times article points out:
In Indonesia, the government spends six times as much on energy subsidies ($20 billion, 4 % of its entire economic output) than it gives on agricultural investments, even as rice prices have skyrocketed this year.
More food for thought (again, pardon the pun):
Food stamp use in U.S. at record pace as jobs vanish
The percentage of Americans receiving food stamps was higher after a recession in the 1990s, but actual numbers are expected to be higher this year.
U.S. government benefit costs are projected to rise to $36 billion in the 2009 fiscal year from $34 billion this year.
Posted by: Rick | Jul 30 2008 13:31 utc | 8
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