Moon of Alabama Brecht quote
July 28, 2008

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?

Posted by b on July 28, 2008 at 15:45 UTC | Permalink

Comments

Surely the idea that biofuel subsidies exert upward pressure on food prices is economic orthodoxy of the most mundane kind. I haven't time to trawl through the NYT archives but I find it hard to believe that Krugman or Levitt, e.g., would not have mentioned this at some point.

Posted by: vimothy | Jul 28 2008 16:18 utc | 1

Pathetic, all this stuff arises from the nonsense of a ‘free market’ which has no relevance at all.

As B points out, the US, thru tax supports agriculture (also crazy schemes for friends or votes like ethanol) heh, and the ‘food weapon’, killing off as much as poss local producers elsewhere, as ppl generally need to eat and will pay anything when starving, and then may die quietly - so terribly sad - they didn’t accept the ‘structural adjustments’ !

The US system is extravagantly socialist, thru for ex. Medicare and Medicaid. It also delivers very low cost water, poor education, roads, infrastructure, etc. etc.

Joe6, the stereotype, with his talk of freedom and his guns in store, his bothersome, invasive, proud individuality, his aggressive talk, gets ‘free’ water, free roads, agri subsidies like you wouldn’t believe (they are somewhat higher in the EU), his kids and his mother on med aid, his kids educated, his handicapped daughter with special help, but true enough, pays ‘world prices’ at the pump. (Not that these prices represent anything real)...and voted for Bush because he said he wanted to reduce taxes. (This is not a uniquely US picture.)

Now he will also be able to ‘default’ (pay less.. etc..) on his mortgage, and yell about the fact that the Gvmt. deal was not good enough for the upstanding, worthy, true flag-waving, Amerikan, types, like him.

The free market is a crack-pot religion. Completely nuts. Made to enslave and snow under.

Posted by: Tangerine | Jul 28 2008 16:57 utc | 2

What's funny is, compared to the rest of the world, US probably comes closer to a price-subsidizer even for petroleum products (not to mention whole manner of other stuff, eg. food). The direct cost of gasoline may not be actually "below the market prices," but we all know about the kind of indirect expenditures in States that subsidize gas use well beyond what a pure free market might bear on its own. A free market haven, US certainly is not, when it comes to oil--and yes, that is also helping raise gasoline prices for the Europeans.

Posted by: kao_hsien_chih | Jul 28 2008 18:03 utc | 3

It's not our fault. It can't be our fault. Must be China's fault. Or the Saudis'. Or somebody elose's - just not ours...

Posted by: ralphieboy | Jul 28 2008 21:22 utc | 4

What does "fault" mean in this context?

Also, as should be obvious, the US (like any country) is neither wholly one thing (free market) nor another (command economy). In order to get to, and stay in, office, politicians have to make consessions to sections of the electorate. Hence some "socialism", and some "free markets". Hence things that people want but don't necessarily make sense or serve their best interests (agricultural subsidies) get pushed through. It's all about pandering to our incoherent whims, innit.

Not sure what Tangerine's point is exactly -- it seems initially like an argument for free markets (lower barriers to entry for developing world producers), and I can only agree with the sentiment. Of course, high food prices are not all bad for the poor, if the poor are net sellers of food!

[Is Joe6 a farmer, BTW?]

Posted by: vimothy | Jul 29 2008 10:18 utc | 5

A good article about this at Oil Panic. In fact it is a damnned good site.

Posted by: peace | Jul 29 2008 11:35 utc | 6

Bernard Chazelle:

Two facts:

1. Measured in purchasing power, the price of gas in china is actually 30 dollars a gallon.

2. California (pop: 37 million) consumes more gas than all of China (pop: 1.3 billion)!

But, when in doubt, blame the Chinese!

Posted by: b | Jul 30 2008 7:13 utc | 7

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

@Rick -

1. Why subtract the tax?

Yes it is relevant for demand, but the point is that the NYT writes "well below market price" and that is baloney. If the U.S. decides to tax gas that is fine, but the then resulting price doesn't say anything about world market price.

2. China import increase is bigger than its consumption increase because its local oil production is decreasing.

3. I consider agricultural subsidies as a lowering of food prices. (The farm bill was $300 billion so there is much more to this that could be discussed). The point is that the subsidy China makes is relatively small and not much different than other usual ones. If China would subsidize like 90% of the gas value, the NYT would have a point. But it does much less, 11%, on an all over still quite small consumption.

Posted by: b | Jul 30 2008 14:15 utc | 9

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