This is China's most serious oil shortage in the past three years. Like the last one, this diesel shortage again originated in the southern provinces of Guangdong, Guangxi, Yunnan and Hainan. Now that most of these provinces�private petrol stations have run out of diesel, diesel users have to rely on the rationed supply of Sinopec and PetroChina.
While China's oil product market has long been monopolized by Sinopec and PetroChina, the two giants have to sell oil products at a price lower than that of the international market as oil products prices are decided by National Development and Reform Commission (NDRC).
The problem would seem to be that crude oil prices on the global market keep going up. With yet another international price hike, the wholesale price for 0# diesel oil in Guangdong, which is highly dependent on imported oil, has reached 6800 yuan per ton. If the SDRC doesn't allow the lifting of domestic prices, Sinopec and PetroChina must sell their products at prices lower than their costs and suffer losses. Recently the international crude oil price surged to $110 per barrel. When the crude oil price reached only $100 per barrel, Sinopec suffered losses of 2000 yuan selling one ton of petrol, and the loss from diesel oil was even greater. The last time China lifted oil product prices was in the last half of 2007, when the NDRC ordered an increase in the price for gasoline, diesel and aviation fuel oil by 500 yuan per ton after November 1.
The situation, however, is not as simple as all that. While controlling oil product prices, NDRC, jointly with the Ministry of Finnance, makes up the domestic market losses of the two oil giants by also granting subsidies, especially to Sinopec with its greater losses. Recently Sinopec was awarded a subsidy totalling 12.3 billion yuan, of which 4.9 billion yuan is required to be accounted for as subsidy income in 2007, and the other 7.4 billion yuan accounted as that in the first quarter of 2008.
The growing crude oil price, though, cuts two ways. China's two oil giants not only manufacture and sell oil products but also between them hold a monopoly in the domestic business of crude oil extraction as well, and sell the crude they pump, much of it on the export market, at international prices, more than offsetting any losses they make in downstream markets.Â
It would seem to be a sweet deal. The two oil biggies monopolize the pumping of oil, which oil they then sell for lots of money. True, they make losses on manufactured products due to government control of prices to keep consumers happy, but the government then generously reimburses them with subsidies for their trouble. Both companies are doing very, very well. Indeed, Sinopec has alleged itself the most profitable company in the world.
But there is a problem here, an enormous conflict of interest, and it is structural. Sinopec and PetroChina can sell their crude for big bucks, or they can refine and sell it for a loss, albeit a subsidized loss. The incentives are terribly skewed. On top of that, the two giants can moan and groan to the government about how much money they are losing on their manufactured products and get the government to let them raise subsidies and/or prices. PetroChina chairman Jiang Jiemin has said the company has applied to the government for adjustments in oil product prices.
One way they can make their case for this is by shorting the supply of oil products and then pointing to the shortage to complain about high crude prices.
The public, then, become the big loser here, facing either shortages, perhaps manipulated, or higher prices, or both,` not to mention the tax money that goes to pay for the subsidies. Here lies great irony, because it is to keep prices low and ensure supply that the government lays on its controls in the first place.Â
The public hotly blames the oil products shortage on Sinopec and PetroChina, as two companies unwilling to provide oil products to the market, especially to private petrol stations, and seeking to force SDRC to increase oil product prices. But it is hard (well, not too hard) to blame the companies for playing by the rules the government has laid down and using those rules to maximize their profits. That is what companies are supposed to do.
The real culprit here is government control, and it comes in three forms. First is price controls. Forcing companies to produce and sell products for a loss is bad for companies. It's also bad for markets, as controlling prices hides the real value of products which the market will set by itself. The second is subsidies, for any number of reasons. In this case, they distort the market, give companies good reason to manipulate the rules to their advantage, and, in using tax moneys to make them up, are giving to the public with one hand while taking away with the other.
The last is allowing the big two to monopolize the upstream industry. Monopolists will behave as monopolists, i.e. they will use their power to control the market to their advantage by controlling supply and by barring entry. Anytime two companies can cause sharp multi-regional shortages of a necessary commodity, those two companies have too much power. Governments, especially of emerging economies, often like monopolies as they tend to provide a certain order in a chaotic world, but that order comes at a high price that gets higher as time goes by.
The government claims it is working to marketize the oil industry, as it is with other industries. Well and good, and the process must be accomplished with prudence. But it is the government’s control over energy market that is the main problem. As long as that remains unchanged, oil supply shortages and price hikes will keep occurring, and triggering consumers�rage, again and again.
Â