This is a good news for the business world. I hope oil prices will be below $125 a barrel after this price hike in China.

If the goverments are so worried about inflation, they should support lower fuel prices. We are driving our Great America in the ground. We are the first to help any nation whenever there is a need. Why are we being punished by foriegn oil countries when we have helped nearly all of them at some time? We are suffering in America. People who are on social security and other programs are in great trouble. They are using all there means just to survive. The price of oil has hurt everyone and will continue until oil prices come down.I’m just one of many that feel this way. We are losing our factories to other countries to save the all mighty dollar. Well let me tell you this, if things don’t change, there won’t be a market for thier product no matter how cheap it is.

In the long run, since China has 4x the US population, it will be appropriate if China uses 4x the amount of oil the US does. Considering how poor most Chinese people are, they aren’t going to get there quickly… but considering how inefficient Chinese industry is, they’ll get there quicker than we’d like.

The US needs to develop a plan for using less oil as it inevitably becomes more expensive on the open market.

We are over 2 years past global peak in oil extraction, these are the best of times, things are only going down hill from now on.
Sadly we who understand all of this look like utter nuts whenever we say anything . I guess only time will tell
http://www.oilcrash.com

Why should have the Chinese increased the prices more? There is no motive behind that. That would only slow their economy down, not solving anything.

In my opinion the raise is a good thing and perhaps should be higher, but one can understand that a >20% rise would be too much pain to be politically acceptable.

I would have to go with the standard free market argument and say that subsidies don’t really help, all they do is pay for consumption or investment that on their own isn’t viable and diverts resources from projects in China itself that have to pay more tax to cover the subsidy and that don’t rely on oil. I wouldn’t think that China itself really benefits from the subsidy when one considers the full opportunity costs involved in it.

The gains to the rest of the world of a removal of subsidies are relatively clear to see unless the 2 reasons given above are correct.
I think they aren’t.

1st argument: True, demand for oil is inelastic(non-responsive to changes in price) but it is not perfectly inelastic therefore a price hike will always generate a fall in quantity consumed, just probably not nearly by the same 17%.

2nd argument: While rationing may be taking place I can’t imagine that it will be removed in lock step with increases in refinery output. There may be a cannibalisation effect in terms of reduced rationing of oil/gasoline but it would surely be less than the increase in output?
After all how can an increase in supply lead to no price change unless Global demand is perfectly elastic which is unlikely.

In fact the two arguments contradict one another, one implies perfectly inelastic demand, the other perfectly elastic. Neither is true in my opinion.

Finally the problem about inflation. The countries who remove subsidies would experience inflation but this is countered by 2 effects.

1. Lower global oil prices would reduce imported inflation.

2. Price is only a proper indicator of real cost (in terms of use of resources and opportunity cost of good project foregone) in a free market, when the market isn’t free there are innumerable hidden costs like rationing and on over-dependence on oil. Removal of subsidies would allow markets to function properly to achieve the best outcome for the country itself.

In the long run they would be best off removing subsidies, of course politics by it’s very nature is taken from a short run perspective.
In both and the short and the long run we are best off with their removal.

The Chinese raising of retail oil products will ironically raise overall Chinese demand for crude oil, than lower it. This sounds at first as counter-intuitive, but becomes a bit clearer if we make the distinction between “price controls”(which China has) and “subsidies” (which India, Indonesia, Iran etc, have).
Price Controls
What is the big difference, one would ask? Well, in the case of price controls, the government decrees what the price would be, and autonomous economic actors make business decisions taking this into account. (You may argue that it China, all oil companies are state-owned in the final analysis; but that’s just it, they behave largely like companies in capitalist countries for a large part of their day-to-day decisions)
Well, with price controls, the effect is that producers will need to lessen their output to minimize their losses, while at the same time consumers will want to buy more of the product that can be provided at that price. This is the case with price controls everywhere. There is thus a shortage of the product (actual and perceived). When price controls are lifted (or adjusted), producers maximize their profit by increasing their production, while consumers adjust their consumption downward, resulting in a new balance (actually, a new state of shortage) in which the price is higher and the overall quantity of product available higher than before.

Subsidies
Subsidies are different. A good example would be the case of Indonesia. It produces crude oil, but cannot refine enough, forcing it to import gasoline and other oil products. Indonesia thus sells a lot of its crude oil, and imports gasoline etc. The government shoulders all the difference. In this case, if the government were to raise the retail prices of oil products, it would result in lower demand for oil.

Thus, to conclude: the Chinese upward adjustment of the price controls will raise the demand for oil. The Indonesian reduction of gasoline subsidies will lessen their demand for oil.
It all depends.

With the blowing up of Nigeria’s biggest production site(SPDC Bonga site) yesterday by Ijaw militants whereby a huge amount of 225,000 barrels is now lost per day, i dont think the increase in price of fuel in China would offer any decrease in price of crude in the world market…I think its time World leader’s have to interfere in Nigeria,s political situation and stop the action of this militants who have now totally overshadowed the Nigeria Govt ability to control them…with continued destruction of oil fields in Nigeria, oil prices would keep going up with an overwhelming effect on the World’s economy.We cant all pretend and put up “i dont care” attitude to the political problems in Nigeria and suffer from high crude prices..production has dropped from 3.2 million barells a day now in Nigeria to a high time low of 1.8 million barells per day, if production keeps going down with continued attacks on oil fields then we are in for a long period of high oil prices.

dont even bother to print if you have read it…….lol

when did the first spike in oil price come? in recent times, and that food price thing????
some time in sep 07 almost the same time when fed started slashing its rates big time. so do you think it came as a big surprise that commodities prices will not go up. Ofcourse it will. You ask a street kid even he knew it. You start minting dollars because of the hole (subprime) that you have created out of your own greed and now blame it on others. Its the same thing where you want to wage wars and then say sorry , it was bad inteligence as create a hole for yourself and blame it on india and china. During 2003 people beleived thwe war story, because it gave them the thrill to beleive it or just because of the heck of it. And now you are repeating the same thing, in a country where you use credit cards to buy chewing gums and think that its the in thing, in a country where waging wars and making it look right is the order of the day, a country which plans coups, wars, and has sect ranches, its really not surprising that an issue like subprime could occur. But still you are defiant people which you like to call resilience. One more thing, why do you blame only india and china, when your people have never cared about the efficiency of your cars, i am sure you have never heard about car pooling and many such things. Why dont you start your own offshore fields and stop blaming others. Even though they have been put off for 27 years on environmental grounds, usa is the largest polluter in the world. Then whats the point of of keeping them off??? One last point, many countries in the west and in europe have thrived by kiiling others. Be it usa , uk, canada, spain, portugal and australia, just check their histories it will be clear. Their options of attacking other countries, and the pretext on which they do that is fast running out……..ty and to Gene, Gene can you name one country which has had economic prosperity and war go hand in hand? Why blame others for that?

Todd,

Good post, as always. I am however not in complete agreement with you. Your suggestion that developing nations stop the subsidies they provide will, without doubt, create even more hardship than there already is in those nations. Aren’t those people suffering enough already?

Also, I don’t think it is fair to blame the rise in oil prices on developing nations. They are just trying to catch up with the first world. In part, the reason why demand in some key developed nations is flat or contracted is because they have better policies in place and enjoy protected economies - something developing nations are still working towards. In their journey towards betterment, demand for oil will increase, as they begin to enjoy the same luxuries that the US and Europe enjoy.

As to the solution…well, I am no economist, but I doubt it lies in an end to the subsidies, or in blaming developing nations.

If all countries were to eliminate their oil subsidies, price for crude could very well drop to $60+’s. But that is just wishful thinking.

I do believe that Todd, the editor should review its article and statement that …”in places like u.s oil demand is flat or contracting which seems to somehow put a shadow towards major oil consumers in the world. It’s all about international pretol’s policy. Mr Hugo Chavez allied with Saudi Arab and all other larger producers will lead the price , far elsewhere they want.

Theories on bringing down oil prices by cutting subsidies or de-control measures have at best marginal effect as long as oil is considered a commodity that lends itself to speculative activity in an environment of asset bubble.The main reason why this bubble has to be sustained has linkage to the sub-prime crisis.It is petro dollar worth trillions that are being used to bail out Citigroup,Countrywide,Credit Suisse,etc. and these funds are generated from high crude oil ptices.When and if these asset bubbles burst,only then can the price of crude be realistic.

The Chinese government will continue to subsidize the price of oil because it cannot afford to antagonize its people. That said, since the global demand is greater than supply, why would world oil prices drop? Every price correction will just be an opportunity for investors and speculators to load up their positions.

Government subsidies always make me nervous because they are often driven by politics rather than what is in the long term interests of a country.

An oil subsidy makes people more hooked on oil, when in fact we should be trying to look for alternatives. However once you have had a subsidy in place in is hard to remove it and when you do, it causes pain for those already doing it tough.

Perhaps China should have gently reduce the subsidy?

Cheers,

Greg

http://www.shareswatch.com.au/blog

Follow the money. Since our own government allows our oil companies to make ENRON-like profits at the expense of our citizens, prices at the pump should be regulated like the price of electricity we pay in many states. Instead prices go up for consumers on a daily basis for oil that is being delivered years later.

Perhaps the Chinese do not allow these ENRON like ripoffs for their citizens? Perhaps they are smarter than we? For all the whining Exxon does, their net profits surge year after year.

Why do some States (or a consortium of States) not build their own refineries and buy oil directly from the Saudies? I like the models we have in place for Electricity — competition is working there.

Some day I will get what we’re doing, but I would leave the Chinese be. Looks like they are not trying to rip off their consumers and putting huge profits in their own coffins. The poor suffer as a percentage of income way more than the rest of our citizens, and not too many people seem to worry much.

In the old days, we called this inflation and raised wages. Nowadays, the cosensus seems to be to treat those folks like slaves, as if the free market will take care of things for those poor folk. In reality we’re running our own economy into the ground, since gradually without raising wages there is no more money for purchasing other products, except for bare essentials. Check the DOW lately? It’s below the level when Bush started office. I like the Chinese balance sheets in the last 8 years.

Let’s see what happens in China I’d say. Let them be.

If I am not mistaken wasn’t it you Todd that said what is good for the U.S. is good for China? Meaning that we cannot expect and demand that a country which is experiencing widespread growth to tame their thirst for it. Now that the western countries have had rampant abuse of oil and the spoils to go with it, who can blame China or other emerging markets to promote growth in their countries by supplying these subsidies to its citizens. I think it is all too easy to look at China and blame them for the turmoil we are experiencing. What is needed are some steady and strong government measures designed to promote alternative energy. while continuing the strong growth of these very exciting markets. What goes around comes around.

When the Chinese all rode bicycles, they burned thousands of calories, no problemo. Now that an exponentially increasing number are driving cars, they’re burning huge amounts of oil in the process…so, yes, Chinese demand for oil is clearly driving prices higher. As you would say, Todd, they have the right to Western comforts too - except that the rest of us will soon be riding bicycles as a result, unable to pay for our gasoline! Well, we’ll be healthier for it, won’t we?

You seem to have the wrong understanding about subsidies and finance.
In order for the governement to subsidize anything it has to get the money from somewhere. That somewhere can only be taxes as governement is not exactly a private enterprise producing profits.
The reason to subsidze fuel is to make it cheaper for companies which create exports but use lots of energy. In this way they are more price competitive on the global market. Easy.
It’s like the famed stimulus package of your governement. That money has to come from somewhere. Taxes or inflation (which is actually like borrowing money from the future, giving it to a very specific group of people now and will be paid by everybody later on but the effect will be more diluted socially so politicians have only to gain from this).

From our point of view, the Chinese should have raised prices more. At the same time, we have to look at it from their point of view. Their goal is to lead their country through a socioeconomic transformation that takes many years, if not decades. Raising prices too much would stifle the spread of wealth throughout their economy and lead to severe social unrest.
If the US can subsidize industries as it chooses, it has no right to expect otherwise from others.

I believe that China is still developing and has quite a way to go before it catches up with the U.S.A. Thus I feel it is only right for its government to subsidize industries which promote further development and to remove the subsidies gradually as it develops further economically. It is only natural therefore that we in the U.S. are paying the price for the years of using cheap foreign labor. It is a temporary disruption which will last until the global economy stabilizes.

As for oil, I personally believe that supplies are growing short, so the price is upward bound no matter what until we convert to alternative energy sources in a big way. As I see it, that means mostly solar and nuclear. That conversion also takes time.

Either or both ways: Hang onto your hats for the next 5 - 10 years!

Makes me think twice about buying “Made in China” supporting the growth of their economy at the expense of “Made in U.S.A.” and supporting our own economy.

oil supplies are running out and it’s time our governments tell us the
truth so we can prepare for the first global depression.Big Oil has run
this world long enough and look at global warming as one example,our water supply is running out at the same time.

Also the Chinese are eating three meals a day.

The oil comsumption of the state of California is larger than any other individual country in the world! People there eat numerous meals a day! CNN does not talk about these facts at all.

Lets see the facts.

Price of gas per little in China 0.95 USD per liter

And in USA
USA 0.983 USD per liter .

Hmm not much of a difference is it?