Strange Impact Of China Raising Oil Prices

It is commonly thought that when a country like China that has been keeping the price of fuel artificially low changes that policy and allows the price of oil product to rise, demand will be destroyed and the result will be less growth in future oil demand in that country. The case of China seems to indicate the opposite. As the Chinese have raised the prices allowed for diesel and gasoline, more of it has been made available to the public by refiners who now find it profitable to provide, thus alleviating prior shortages. It seems logical to expect that the result will be a rise in fuel usage in China.

Some analysts seem to forget that prices impact both supply and demand. A higher price might tend to reduce demand - or not, depending on its elasticity - but it will most certainly tend to ameliorate a problem of insufficient supply. So if other countries have encountered similar problems of supply reductions based on an inability of the local middlemen or refiners to make a profit - and I am not sure how common this is in countries other than China - we might not want to be so certain that when they remove price controls the result will be less oil usage.

Incidentally, China now imports half of the roughly 6.2 mb/d of oil that it uses. Imports were up 12.3% in 2007, an increase of about 380 kb/d, according to the Oil & Gas Journal of 4/7/08, p.9. China was an exporter of oil through the late ’90’s.

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