Update on the Chinese Situation

The situation in China seems to be getting worse. The most comprehensive coverage appears to be from the South China Morning Post (SCMP) which requires a subscription, but which is abstracted at Simonworld (via Econbrowser).

HO Posting will now be somewhat lighter for parts of the next week, as I head out on travel.

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We better hope that this is just the free market asserting itself, as unlikely as it seems. If they're deliberating rationing gas they may know something we don't.

China and India are now in a bidding war for a Canadian company that owns PetroKazakhstan. PetroChina offered $3.2billion yesterday and Oil and Natural Gas Corporation of India just upped their bid to $3.6billion. I would expect to see some more shenanigans of the Unocal sort here as well.

By the way, both oil companies bidding for PetroKazakhstan are state owned.

From reading the newspaper report in the link, looks to me like China is inbetween a rock and a hard place. They simply cannot refine enough gasoline to meet the tidal wave of demand. But they cannot allow prices to fluctuate with the market so that demand will come in line with price.

I suspect the Communists are trying to keep the economy growing and keep the people from revolution due to lack of jobs and, for most, food. Price spikes may dampen demand, but also, possibly, lead to a sharp recession. No one, not even the good ol' USA, wants that. This is all speculative of course...

"But they cannot allow prices to fluctuate with the market so that demand will come in line with price."

One of the big problems with petrol price fluctuations in China is that private cars are a relative newcomer to the economy, and still largely a luxury, or at best convenience. The economy runs on bicycles, public transport, and a huge, relatively cheap taxi fleet.

It's just not practical to change the fares for buses and taxis with the same frequency that U.S. gas stations change their prices, so it's necessary to dampen the volatility of pump prices.

The problem they're facing now in China is that nobody knows for sure how much of the current oil price is speculative, how much is cyclical, and how much is secular, hence it's hard to plan for what public transit fares should be set at.

The system really isn't set up for 20% increases in crude prices over 3 months.