On Thursday, after a U.S.-China economic summit, Beijing announced that it would raise state-controlled gasoline prices by 17 percent, to about US$3.06 per gallon. That's still far below what Chinese motorists would be paying if they had to absorb the full effect of global oil price increases, as Americans do -- but it's a start.
By now, it is conventional wisdom that the surge in oil prices is driven at least in part by booming demand in fast-growing developing countries such as China and India. Until recently, it has been less widely appreciated that developing-world demand was not a purely spontaneous result of economic growth. Government policies designed to hold down the politically sensitive price of energy have artificially stimulated energy consumption.
China and India are hardly alone in this regard. Other big subsidizers have included Malaysia, Indonesia, Vietnam, Iran, the Gulf states, Russia and Venezuela. In 2006, the International Energy Agency estimated that total energy subsidies in the 20 largest economies outside of North America, Europe and Japan had reached US$220 billion annually; of that, US$90 billion went for gasoline, diesel and other oil products. According to a Deutsche Bank forecast before China's policy change, all of the growth in oil demand in 2008 was likely to come from nations that subsidize consumption.
Already facing rising inflation, China undoubtedly would rather have avoided the price increases. And, though the Bush administration has raised the issue with renewed intensity in recent days, the Chinese probably would have ignored U.S. hectoring if they could have. Beijing had no choice, however, because, with oil prices higher than US$130 per barrel, fuel subsidies were beginning to drain the national treasury. There has been unrest in other energy-subsidizing countries that have raised prices in recent months, among them Malaysia, India and Indonesia. But there was unrest in China even with price controls because underpaid refineries were cutting back production, leading to shortages and angry gas lines.
.
