Tuesday, March 20, 2012

China embracing Western ways, an ominous sign

China raising fuel prices to help their refiners. This is mostly aimed at CNOOC the national oil company, which is apparently unprofitable. It's unprofitable because it buys oil at market prices and sells it at below market prices set by the government.

That might seem strange to a Westerner and bad for CNOOC, but it's good for Chinese consumers. It's one way that the government supports incomes and domestic demand. Subsized fuel prices keep inflation down and add to disposable incomes.

The fact that China is raising prices is instructive. It signals concern for corporate profits over consumer demand. That's a very "Western" way of thinking. The problem is, we see what the "Western" way has wrought in terms of unemployment and growth. Corporate profits in the West are at a record, but so is unemployment and the general misery of the public. Policies like these could be dangerous in China.

This price increase constitutes a tax on the lower income and the poor to support CNOOC. So much for helping domestic consumption. Exactly the wrong policy. China hard landing scenario just bumped up a notch.


Clonal said...


In oil companies owned by the public sector, there is another reason, other than profitability to raise prices - and that is to curb consumption. If the price rise is large enough, it will reduce wastage of a precious resource. If the reduction in oil consumption comes by a reduction of wastage, then it is a good thing. The government can always give a point of use subsidy for uses of oil that are considered essential. This is often the approach used in India, where the Oil Companies are also owned by the public sector.

It is a policy decision whether to show the oil price increase as a tax, or as increased revenue to the public sector oil company. The same purpose is achieved either way - the purpose being to spur a more efficient usage of a precious resource.

Matt Franko said...


So for us even tho we dont have state owned oil cos., we can raise taxes on oil and it may have the same effect as far as demand destruction?

Although here it would not be as friendly to our oil cos to do the tax?

This is all convoluted nonetheless.


Clonal said...


In the US, raising prices on oil as a tax is an unpopular idea. Raising prices by increasing corporate prices somehow is more acceptable, even though the 99% see no part of that increased profit.

However, if a state was to raise revenue by taxing oil, there would be a hue and cry, even though most of the tax revenue would benefit the 99%.

Just the way propoganda works!

Leverage said...

In Europe oil taxes have been risen and still are increasing sometimes (in Spain ie. there has been only a few months ago sicne were risen again). IMO there is a genuine concern on deficits coming from energy costs (which btw are the main element in the trade account increasing deficits) and long term costs of this dependency.

In rising prices investments are cost-effective in other energies and areas. I agree with these policies to be honest, I don't see how making energy and fuel costs come down can be beneficial in the long term.

BUT the market prices are being totally distorted by manipulation and credit easiness, liquidity, etc. They don't respond to supply and demand, when on origin production costs are below 10$ there is no sense on having spot prices at 110$.

The way you help it is subsidizing other energy sources, promoting big investment plans and private-public partnerships and making them more efficient tax wise. Not subsidizing oil producers, crony corporations and corrupt governments with big oil export industry.

One policy favours everybody, created jobs home, creates infrastructure and real wealth; the other is giving money to a bunch of already rich bunch (1-0.1%) at the expense of everybody or promoting casino capitalism. Screw that.