China Buying Time at $2.49 Per Gallon
June 6th, 2008In short: The Chinese government is massively subsidizing gasoline prices.
Via: Forbes:
Beijing is holding down many prices–including oil–with a cumbersome price-control scheme.
Consider the following: Since January 2007, global crude oil prices have risen by 109%; gasoline prices in the U.S. have risen by 77% (roughly apace); gasoline prices in China have risen only 9%.
Gasoline in the U.S. now sells for around $4 per gallon, but it sells for $2.49 per gallon in China. Beijing last raised domestic gasoline prices in November 2007, by 9%, and that was the first and only hike since January 2007, when crude was $87 per barrel. A recent rumor that China was about to lift its gasoline-price controls was quickly dismissed by Beijing.
China’s energy sector, regarded as “strategically vital,” is dominated by three giant state-owned enterprises. If Beijing wants anything in energy, it is control. But as China becomes more integrated into the global economy, global rules–not China’s rules–are increasingly intervening.
So here is where it gets really crazy. China National Offshore Oil Corporation, largely an exploration and development driller, sells its output at roughly the globally-set crude oil price to the state-owned refiners, primarily PetroChina and Sinopec. CNOOC’s earnings were up 56% in the first quarter of this year, in a global bull market for oil. No surprise.
Sinopec, conversely, with little drilling capability, buys crude at the global price and sells at the state-controlled retail price, taking a giant bath on every gallon of product they sell. During the first quarter of 2008, their earnings were down 81%. Ouch.
Then there is PetroChina, which has considerable domestic production but also must buy some oil at world prices and sell at the below-market state-set price. PetroChina’s earnings were down 56% in the first quarter.
Beijing will subsidize the domestic gasoline retailers, mostly Sinopec and PetroChina, about $40 billion this year for the price-cost squeeze just described. The oil bureaucrats in Beijing mean well, but what a tangle! How can global investors make any sense of this?
At some point, the domestic oil price in China must rise to the world price, but, at present, that would unacceptably lift inflation. So Beijing watches and waits with a price system that is not functioning. Beijing can afford this massive subsidy to China’s oil consumers with its current favorable budget situation.
But make no mistake: This hold-down of retail prices is a subsidy to energy consumers that is hidden in the government’s budget. The taxpayers are paying for these lower oil prices. They just don’t see it at the pump with the current inflation statistics.
What better way to extract value from those piles of dollars due to the trade imbalance while allowing their own economy to continue humming along as the rest of the world moves into a slowdown. Since this will only work while the dollar still carries weight, they need to unload them fast. Another bonus for China: their oil partners will love all the money that keeps flowing to them while other countries abandon the oil market — further securing China’s positive image with them so that when the world economy falls of a cliff or peak oil effects become onerous, China will be well positioned to be the destination of choice for all that oil that can’t be bought elsewhere.