By on June 12, 2008

china_468×312.jpgPaul Eisenstein of The Car Connection's Industry Insider blog thinks that China's going to cut the fuel subsidies that have insulated the Middle Kingdom from rising gas prices. Prices for gas have risen only nine percent since January 2007, compared to the nearly 80 percent jump suffered by American drivers in the same period. With the Chinese paying about $2.60 per gallon of unleaded (the exception to China's love affair with all things leaded), demand is still rising in China, with 1,300 new cars hitting the road every day in Beijing alone. So when will China make the much-needed subsidy cuts? Eisenstein joins the growing consensus that suggests the bitter medicine will be administered sometime after the Olympics, when China will be basking in global PR afterglow. With neighboring developing economies recently cutting fuel subsidies (Indonesia, Malaysia, Sri Lanka, Taiwan and India), the International Herald Tribune reports that the such cuts are necessary across the board to help keep global oil prices from spiraling out of control. With the International Energy Agency taking up the fight against subsidies, expect pressure to mount on China to end incentives for fuel consumption. Eventually. 

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15 Comments on “China To Kill Gas Subsidies?...”

  • avatar

    time to sell my china mutual funds, this could really slow down their growth.

  • avatar
    Robert Schwartz

    I am sure the Chinese Government is not thrilled by a loss of $2/gal.

  • avatar
    Alex Rodriguez

    This will have no effect on oil prices, in fact it will probably raise them because even though demand will probably start to nosedive by a 2 million barrels a day, that will more than be made up by the forecast of 16 Hurricanes in the year 2075, compounded by the fact that Ahmadinejad reported took a VERY large dump yesterday. The investors are EXTREMELY keen, and take notice of these important announcements, while wiping Dorito crumbs from their boxer shorts.

  • avatar

    But then who will GM sell Buicks to?

  • avatar

    Nearly everyone loves to pick on ethanol subsidies, but few pay any attention to oil subsidies.

    Venezuela sells gas for about 12 cents/gallon. Saudi Arabia about 45 cents. Iran about 70 cents. Many other Middle Eastern countries subsidize oil even Egypt. Mexico subsidizes oil. Texans can cross the border and fill up with cheaper Mexican oil. China subsidizes oil and so does India. Plus there are others.

    American oil subsidies are less obvious. The SPR is in effect a subsidy since it removes oil from the market thereby raising price pressures. The oil depletion allowance is a subsidy since corn growers do not receive a soil depletion allowance. Wars for oil security in the Middle East are subsidy for oil. We are subsidizing oil with blood as well as money.

    With high gas prices the state tax on gas in Iowa (a fixed 20 cents/gallon) is now less than the sales tax on clothes for example. This a de facto subsidy for gas consumption.

    All ethanol subsidies do is level the playing field a little. If domestic and foreign oil subsidies are ever removed, then ethanol subsidies should also go.

  • avatar

    The growth of Chinese exports is slowing, thanks to the chill in the US economy and the global credit crunch.

    As the slowdown filters throughout the world, their export growth should shrink further and even flatten. So their demand growth for oil should also slow down with it.

    On one hand, it won’t matter much whether they cut subsidies or not. Despite all of the media chatter, Chinese oil demand is less than 9% of the world’s total. If demand declines slightly from the loss of subsidies, the impact on the global pool is minimal.

    The main benefit would be psychological. It would certainly start putting doubt in the minds of investors. These days, supply and demand don’t really matter, as psychology is driving most of it.

    Still, I go back to the real problem, which is the war in Iraq. If you want cheaper gas, figure out a way to end that, and you’ll get it.

  • avatar

    The SPR is a drop in the bucket. Besides that, it has a bigger calming effect when full, than inflationary effect when being filled.

  • avatar

    The SPR is a drop in the bucket. Besides that, it has a bigger calming effect when full, than inflationary effect when being filled.”

    I’ll second that.

    Indonesian is a particularly interesting example of fuel subsidies. They have been slowly cutting them and expected to market float the price soon. People are very mad there as you can imagine. At the same time they are giving up their OPEC membership since they are an oil importer now as their oil fields have depleted.

  • avatar

    Expect a slow easing off of subsidies, not a sudden removal. The last thing China’s government wants is riots and mass demonstrations over a sudden jump in gas prices.

  • avatar

    With the Chinese paying about $2.60 per gallon of unleaded (the exception to China’s love affair with all things leaded),

    Love it, that made my morning.

  • avatar

    The subsidies in OPEC nations are different than in a nation like China. They simply sell the oil products to their people at cost or something approaching it rather than at global market prices. Remember, it only costs Saudi Arabia approximately $5 per barrel to produce oil or about 3.7% of the current market price.

  • avatar

    Still, I go back to the real problem, which is the war in Iraq. If you want cheaper gas, figure out a way to end that, and you’ll get it.

    Depends on how you end it. If you allow Iran and/or Syria to gobble up Iraq, you’ll likely see an increase in uncertainty and continued high oil prices.

  • avatar

    Since Iraq is producing more than it did during the embargo years, ending the war would have negative effect as a new civil war with more Iranian intervention would greatly reduce Iraqi oil production. And such a defeat would drive speculation even higher as Kuwaiti and Saudi oil would be threatened by the victorious Iran.

    The oil subsidies in oil producers like Saudi Arabia do have a cost to Saudi Arabia. That’s a product they could have sold for a lot more on the open market. That’s still lost govt. revenue. In fact, it’s even costlier than the Chinese subsidy.

    The Chinese have a lot of rebuilding to do after the earthquake. Phasing out the subsidy will help to pay for that reconstruction.

  • avatar

    A bigger problem is all the govt. interference in oil production around the world. Putin and his buddies blatant stealing of oil wealth is going to greatly inhibit further development, as it did in the Soviet era. Chavez and the mullahs are both failing to maintain the necessary infrastructure spending to keep the oil flowing. The US govt. continues to ban most development of US fields and now threatens to restrict US oil companies even more. Mexican and Nigerian govt. corruption continues to produce great inefficiencies in their efforts too. It’s a complete farce.

  • avatar

    Hold on, folks, we need to keep in mind the dictionary definition of subsidy: “a grant by a government to a private person or company to assist an enterprise deemed advantageous to the public.” So not every incentive or benefit is a subsidy, and in China’s (or Venezuela, etc.) case the “subsidy” goes to consumers by means of below-market pricing. Everybody’s for that, right? We all want cheaper gas, houses, food, right? Of course, taking from Peter to give to Paul is a zero-sum game. The pain (or lost opportunities) is just felt elsewhere.

    As for that oil depletion allowance 97escort is unhappy about, percentage depletion was abolished for Big Oil long ago. (The Left keeps kicking that dead horse, because it feels so good.)

    Federal and state taxes on gasoline are basically user fees to support road construction and maintenance; there is no reason they should be in lockstep with a general sales tax rate. The SPR is no more an oil subsidy than banning leaded gas; both reduce what reaches the consumer market. That serves to push up not only the retail price but also the wholesale cost. It should be remembered that in the US, oil companies have to buy oil before they can sell it.

    And finally, neither the war in Iraq that started in 1991 nor the war against us that Iran began 29 years ago is a subsidy to our oil companies, unless one believes that any effect on global oil prices (whether it be up or down) is a subsidy to ExxonMobil.

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