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Efficient oil use vital for sustainable growth

(China Daily)
Updated: 2008-07-03 15:31

[The author Yi Xianrong is a researcher with the Institute of Finance and Banking under Chinese Academy of Social Sciences]

From June 20, the prices for gasoline and diesel were raised by 1,000 yuan ($144.9) per ton and the price for aviation kerosene was up by 1,500 yuan ($217.4) per ton. Compared with the huge losses of oil refiners, this rise is quite limited. Further hikes would be necessary to balance their losses.

It has been urged repeatedly to raise the refined oil product price in the country, but the authorities did not act accordingly till now and the rise is not as dramatic as expected. They have good reasons for doing so: raising prices of refined oil products is like pouring oil over the already-strong flame of inflation in the country.

As the consumer price index (CPI), the foremost indicator of inflationary pressure, has kept growing dramatically in nearly one year, it is a primary concern of policymakers to curb inflation. Maintaining the price of refined oil products is an important aspect in easing this pressure.

As a matter of fact, the price hike should have been decided long before June 20. The earlier and the more the price is lifted, the more benefits would be achieved for the Chinese economy and the domestic capital market. The negative influences would be strengthened as the price rise is delayed.

Researchers said before the latest price rise the central government should give 330 billion yuan as subsidies to oil refiners every year to ensure the supply of refined oil products on the market. This amount is based on an international oil price of $130 per barrel. If the international oil price keeps going up, the losses of the refiners from refining imported crude oil would be boosted and the subsidies might be raised accordingly.

When the price of refined oil products are raised, the refiners could see less deficits and the government could reduce subsidy to refiners and use the saved money for other public services. Such a prospect is definitely constructive to economic soundness.

According to customs statistics, China imported 145.18 million tons of crude oil in 2006 and imported 159.28 million tons in 2007. The figure for 2008 is estimated to be 170 million tons. If the international crude oil price keeps climbing like it has done in the first six months of the year, the huge oil import alone would cost China a big fortune.

Why is China so thirsty for oil? An important element is the dramatic growth of private cars. Between 1996 and 2006, the private cars rose from 2.9 million to 23.3 million and the net growth in 2006 was 4.85 million.

So many private cars have become a source of inflexible demand for gasoline.

Therefore, it is natural for people to wonder why so many people decided to own a car. Admittedly, some have better income to support their consumption and some find the automobiles are less expensive thanks to the development of the automobile manufacturing industry.

But more importantly, it is because many consumers do not consider the cost of using automobiles, because that cost could be negligible because of the low gasoline price.

To promote sustainable economic development, it is necessary to adjust the domestic oil consumption through price change. The individual demand to refined oil products not only weighs significantly upon the balance between the demand and supply within the Chinese market, but also influences the international oil price.

On the day China released its oil price hike, the crude oil future traded on the New York Mercantile Exchange dropped more than $4 per barrel. After that, the price keeps climbing again. One of the reasons for the latest rise is that the Chinese oil price was not raised to a reasonable level, and the international market expects more rises in the future.

If China curbs the growth in its oil demand, the speculation in oil price could be checked and the country could also save a lot of money. If the oil price dropped by $50 to about $90 per barrel, where it was in early 2008, China could save nearly $100 billion, which could be used to subsidize the life of common people or the businesses.

The oil price hike would not intensify the inflation because the energy price takes a minor portion in the CPI basket. The food price, which takes about 35 percent in the CPI figures, is going to drop, so there is more room for the decision-makers to raise the oil price.

If the oil price could be raised to the ideal point decided by the demand and supply on the market, it would help restore the investor confidence on the stock market. One of the biggest ills in the stock market is the price control by the government to the products of some listed companies. On the one hand, the government required oil refiners and electricity generators to ensure the supply of their products despite their financial losses. On the other hand, it maintained relatively strict control over the prices of these products.

It is against the law of the market economy that the listed companies keep operating on losses. So most investors would refuse putting their money in these companies or even quit the market. The continuous slump on the stock market stems from the destroyed confidence of investors. Such a slump hurts the market mood and poses challenges to the long-term development of the Chinese economy.

It would relieve many economic headaches if the refined oil is priced by the demand and supply in the market. And the influence of the price rise could be contained if the government takes necessary measures to safeguard it.