Here is what we consider to be a graphical representation of the difference between Communist capitalism (as in China) and Capitalist capitalism (as in the US) – divergent costs of motoring.
It comes from John Kemp at Sempra Metals, who notes that in China domestic gasoline and diesel prices are set by the government rather than the market, with the National Development and Reform Commission setting a benchmark price. Filling stations are required to sell fuel at a price within plus or minus 8 per cent of the benchmark.
The government has raised the benchmark repeatedly over the last five years but by nowhere near as much as the increase in crude oil prices. Until the end of 2006, the benchmark gasoline and diesel prices were raised broadly in line with crude. But since then the government has authorised only one price increase in Nov 2007. NDRC officials are reluctant to sanction further increases in case they fuel already high rates of inflation or provoke social unrest. Gasoline and diesel prices are being held down in line with many other basic commodities as part of the government’s broader strategy of relying on price controls to bring down the inflation rate.
China’s refiners now make losses on every barrel of imported crude oil they refine and the government has agreed to provide subsidies to the second-largest refiner, Sinopec, amounting to more than $10bn a year.
There are repercussions here:
The artificially low level of the controlled prices means that China’s manufacturers and households are not receiving a strong signal to conserve fuel. Even as crude oil prices rise, China’s consumers and businesses have no incentive to cut gasoline and diesel use.
Rising crude oil prices are helping ration demand in the advanced industrial economies, but have no impact on demand in China, which is where all the marginal demand is coming from for increasingly subsidised gasoline and diesel.
Indeed, price controls are not restricted to gasoline and diesel. China has also banned price increases for electricity and a whole host of other raw materials and foodstuffs – keeping commodity demand artificially high despite surging prices and adding to global inflationary pressure despite the slowdown in the United States.
Such market-bending policies are evident across the Middle East and Asia, Kemp notes, before concluding:
The Great Depression of the 1930s was made deeper when the United States (Smoot-Hawley), the United Kingdom (Imperial Preference) and other countries tried to protect their own economies by resorting to price- and trade-distorting tariffs, causing world trade volumes to collapse.
The global downturn of 2007-2009 will be made deeper and longer if emerging economies across Asia and the Middle East refuse to allow domestic commodity prices to rise in order to restrain demand, ensuring that inflation worsens even as the economies of the United States and Western Europe slow.