Friday, June 20, 2008

AP: China Fuel Price Hike May not Sap Demand

Just so you have the "other side" of the story (opposite to my view), here is a thesis (that we see in other sources at well) that somehow by increasing costs, that will increase Chinese demand for energy. Aside from going against Economics 101, you just have to remember everyone is talking their book and with so much institutional money now betting on ever higher prices - every theory out there will be thrown out to support prices. While I can "see" the case outlined in this story, the fact that Western countries have been seeing demand destruction now in earnest for 3-4 months, and Asian countries now are decreasing subsidies, which will cause demand destruction there as well (ex-China at least), I find it hard to believe that 1 country which consumes 10% of the world's petrol can be the cause of a spike of this nature. The main thing is, unlike in certain political circles, is to listen to both sides of the argument and then make your own judgement (which could be right or wrong). But to ignore the opposite side of the argument is folly.

Again, logic means very little in the market, and standing in front of a freight train is risky business... this move in petrol will end when it ends, not when logic dictates it will end. Perception is reality. So even though logic would dictate prices should be going down in relatively short order, we have to be cognizant of trends, especially with computers (with no emotion) doing 70%+ of all trading nowadays - and they have shown us to be the most diligent momentum traders of any era. In the end it's all about perception - if perception is the end is near, all these "long and strong" oil traders will flee en masse. But until then.... ?

One important note in China - retail motorists (say car owners) are but a small portion of their energy demand... much of it is transit, industrial use, and the like.
  • The jump in China's state-controlled fuel prices will inevitably squeeze consumers at both filling stations and grocery stores. But analysts say the hike is unlikely to make an immediate or huge dent in the country's hunger for oil.
  • China's economy is booming, and people are buying cars and air conditioners as their incomes grow. There is huge pent up consumer demand in a country of 1.3 bilion where per capita energy consumption is still far below wealthier countries.
  • Also, the price hike of up to 18 percent is likely to prompt refiners to boost production of crude oil, gasoline and other refined products. Previously, they had held back because they were losing money on the wide gap between global crude oil prices and state-set retail prices, which had created widespread fuel shortages.
  • "Do not expect an immediate fall in China's oil imports -- the price effect on demand will work in China as well, but it will take some time to work through," Wang Tao, an economist for UBS Securities, said in a report issued Friday.
  • Some analysts said the oil market may have overreacted to the news from China, with some traders buying oil futures on the belief that their climb will continue. "Whether domestic demand cools, or the price increase simply serves to bring more refining capacity on-line to satisfy China's voracious appetite, remains to be seen," said Jing Ulrich, chairwoman of China equities for JP Morgan Chase & Co.
  • The government has been paying billions of dollars in subsidies to the country's two big state-owned refiners to make up for the losses. Many smaller loss-making refiners had shut down or cut back their operations.
  • The government hiked fuel prices by about 11 percent in November but had kept them frozen at that level, seeking to avoid adding to inflation, which has touched 12-year highs since the beginning of the year.
  • The hike raised the price of gasoline by 1,000 yuan ($145) per ton to 6,980 yuan ($1,015) -- more than 16 percent -- and diesel by the same amount per ton to 6,520 yuan ($949) per ton -- an 18 percent hike.
  • To protect individual consumers, the government said it would not allow any increases in bus and subway fares or taxi fares. Natural gas and liquefied petroleum gas prices will remain unchanged, and subsidies to the poor and to grain farmers would increase, it said.
  • Residential housing and farming and fertilizer industries will be exempt from a 0.025 yuan (0.0036 U.S. cents) per kilowatt increase in electricity rates for most businesses, the planning agency said.
  • The hikes "will be quickly passed on to consumers through other channels, especially food prices in urban areas," said Vivian Chiu, an analyst at Merrill Lynch, said in a report.
  • Despite surging oil costs, the country's imports of both crude oil and oil products have surged to unprecedented levels as it builds up national stockpiles, while exports have plunged. Crude oil imports rose to 59.8 million barrels in January-April, up 10 percent from a year earlier.
  • Gasoline imports skyrocketed by nearly 20 times to 554,000 tons in January-May while imports of diesel jumped by more than nine times, to 2.9 million tons.
  • Despite the surge in overall demand, China still consumes far less energy per each of its 1.3 billion people than the U.S. or other wealthy countries. Streets are dimly lit, apartment buildings often are illuminated by lights triggered only by movement or sound and ownership of private cars, though growing quickly, remains relatively low.
  • Pinched by surging costs for labor, land and materials -- as well as energy -- Chinese industries are finally beginning to cut back on the waste that has made them far more extravagant energy consumers than private citizens. (free markets are a beautiful thing)
All in all it sounds like the Chinese government is trying to put this added cost onto businesses, and not consumers. But the logic is shaky - as if businesses won't pass costs onto consumers in the end... ? Interesting nonetheless.

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