Commentary

Good Fuel Economy

Any country pursuing economic liberalisation could learn much from America’s successes. But, these days, China might learn more from America’s failures. In booming Guangdong, energy price controls have forced lorry drivers to wait in long lines for diesel fuel. Because Beijing forces oil refiners to sell their products at prices well below what it costs to produce them, the refiners have cut back production capacity, resulting in long queues at the pumps. “Oil futures are near US$100 [a barrel], but the price we sell at is only US$60. We are still losing money,” a Sinopec executive told The Wall Street Journal last month.

For 17 months, planners kept Chinese oil prices fixed, while the true market cost skyrocketed. Now, thankfully, the government seems to have got the message. At the beginning of last month, Beijing raised fuel prices by roughly 10 per cent, in the hope of ending the shortages. It helped – but only allowing prices to return to market levels will restore a healthy equilibrium of supply and demand.

China’s policies have precedents in America, and they’re not pretty. In 1973, the oil crisis induced the US government to pass oil price controls, which most Americans knew better as long queues at petrol stations. Then, in 1979, the Iranian revolution disrupted world oil supply for the second time in a decade, creating another big spike in prices. US president Jimmy Carter instituted price controls again, resulting, as before, in long queues.

Drivers waited hours to fill up their cars, often in lines hundreds of vehicles long. In the state of Maryland, governor Harry Hughes proposed an “odd-even” system of rationing, under which cars with oddnumbered licence plates could fill up on odd days, and cars with even-numbered plates did so on even days. It was bizarre, and it certainly wasn’t popular.

[O]nce a government begins to control prices and ration scarce goods, it’s hard to stop.”

And, of course, once a government begins to control prices and ration scarce goods, it’s hard to stop. It didn’t take Beijing planners long to recognise that the price controls were hurting their own oil companies but, instead of allowing them to charge what the market would bear for the products, they tried to compensate the companies for the losses. And, so, the lunacy of the controls compounded itself.

“The government forces state-owned or state-controlled firms to absorb losses that analysts say are now running at up to US$10 a barrel on imported crude,” John Ruwitch wrote recently in the International Herald Tribune, so “for the past two years, [Beijing] also doled out hefty year-end compensation to Sinopec, the worst hit”.

Sinopec controls about 80 per cent of the Chinese market for refined petroleum products, and the China Daily reports that, last year, the bailouts cost the government more than US$1.2 billion. So, Beijing essentially forced consumers to pay for the inconvenience of queueing. The Chinese government knows how much it paid out to aid ailing firms, but it will never really know how much harm it dealt the overall economy. In May last year, Beijing allowed petrol prices to rise 10.6 per cent, and diesel prices to go up 12.3 per cent. No doubt, governing bodies made those decisions on the basis of some economic analysis but, as anyone familiar with the laws of economics has to wonder, what did these economists know about demand that the consumers themselves didn’t?

Often, spiking prices aren’t pleasant, but they’re not the end of the world, either. As my colleagues at the Cato Institute, Jerry Taylor and Peter Van Doren, point out, in the last week of September 2003, oil was selling in US spot markets for US$23.86 a barrel. Five years later, prices are four times higher, but the inflation, unemployment and recession that supposedly follow oil price shocks are nowhere to be seen.

The Communist Party has staked its legitimacy on the ability to continue delivering economic growth at what, by historical standards, is a blistering pace. Party officials seeking to ameliorate popular discontent no doubt want to shield ordinary people from spiking prices but, like them or not, market prices are a reality.

Allowing prices to rise and fall, as they will in the market, can actually relieve pressure on governments. Scarce goods are scarce goods, and even an all-powerful party can’t control everything. By recognising certain adversities as facts of life, a government can absolve itself of the onus of having to put an end to them. After all, putting an end to them sometimes creates bigger adversities elsewhere.

David Donadio is a writer and editor at the Cato Institute.