On 1st June 2009 China’s government raised the benchmark pump prices for gasoline and diesel by 6% and 7% respectively. This follows an increase in jet fuel prices of 13% in mid May, and comes after earlier increases in gasoline and diesel prices of about 13% in late March. Pump prices for gasoline are now close to Yuan 6.00 per litre or US $ 4.00 per gallon, 40% higher than current pump prices in the USA.
This succession of price increases for oil products is part on a new policy launched on 1st January 2009. In the past few years, as explained in my earlier columns, China’s domestic prices for oil products did not rise in line with international crude oil prices. Instead the government kept prices for oil products firmly under control in order to minimise the domestic social and economic impacts. As a consequence, the oil refining companies required ever greater subsidies from the government to compensate them for growing financial losses as international oil prices rose from US $ 20 per barrel in 2002 to a peak of US $ 145 per barrel in July 2008. Further, this policy dampened the incentives for the users of oil products to curtail their consumption of oil products.
The beginning of 2009 saw China’s government take two initiatives relating to the pricing of oil products. The first initiative increased the proportion of tax in the pump price of gasoline and diesel from 4% to 18%. However, the short-term impact of this tax increase was offset by a reduction in the price of the fuel itself. Thus the initial tax rise on1st January 2009 saw no change in pump price. Indeed, pump prices were lowered a further 2-3% on 15th January.
The second policy initiative made an explicit link between domestic oil product prices and international crude oil prices. As explained in May 2009, four months after its introduction, the new policy would make an adjustment to domestic product prices if international crude oil prices fluctuated by more than 4% for 22 consecutive working days. However, the government retains the right to constrain the rate of increase of domestic prices, especially when they rise to levels seen in 2008. China’s oil refiners are to enjoy “normal” profit margins when crude oil prices are below US $ 80 per barrel. Their margins will be reduced if oil prices rise above US $ 80 per barrel, and may even be capped if prices rise above US$ 130 per barrel.
These new policies have led to pump prices in China rising by 10% since mid January, but this compares to a doubling of international crude oil prices over the same period. Further increases in pump prices are expected over the summer.
Despite this continued desire to protect consumers, China’s government has clearly started on a new path to address the valid concerns of the oil refiners and to provide signals to consumers to persuade them to save energy. Both are key factors in the government’s ongoing policies to enhance domestic security of energy supply. If oil refiners cannot make profits, they can reduce their output of oil products in the short-term and may even reduce the level of investment in new refining capacity in the longer term. If consumers have to pay more of gasoline, they may reduce their consumption. But influencing consumer behaviour is one of the great challenges in energy policy anywhere in the world.
The quantity of oil product used by road vehicles depends on a number of factors, for example: the number of vehicles in use, the source of energy fuelling the vehicles, the fuel efficiency of the vehicles, the number of kilometres driven and the nature of the journeys undertaken.
Annual sales of light vehicles in China rose from 2 million in 2001 to 9.4 million in 2008. Though the rate of increase fell from 22% in 2007 to 6.7% in 2008, sales surged again in April 2009 and automakers have boosted their prediction for 2009 from 5% at the beginning of the year to 8% in May. This would take total sales in 2009 to 10.2 million vehicles.
The Chinese government has taken bold steps both raise fuel efficiency standards among car manufacturers and to encourage people to buy more efficient vehicles by varying the sales tax on new private cars from 1% for the most efficient to 40% for the least efficient. Further it is introducing subsidies for hybrid, electric and fuel cell cars and for dual-fuel public transport vehicles.
The differential sales taxes introduced at the beginning of 2009 seem to have had a positive effect on consumer purchasing behaviour. Recent years have seen a high level in the buying of new, large, luxury cars and SUVs. But the new policies seem to be taking effect already, for the total sales of cars with smaller engine size surged in the first quarter of 2009. The market share of cars with an engine size of 1.6 litres or less grew by 8%.
China’s growing affluent middle classes are still keen to buy cars, but there are signs that they may become content with smaller cars. However, there remains a large stock of inefficient private vehicles which are relatively new, and the owners are unlikely to sell their recent purchases immediately in order to buy a smaller vehicle. Already there is anecdotal evidence that those individuals with large, inefficient vehicles are cutting back on how much they drive. Fuel prices in recent months have risen much faster than salaries, and some individuals are seeking to reduce their expenditure on gasoline.
But if they do indeed decide to use their own vehicles less, what will they do? Will they travel less, will they use public transport such as buses and trains instead, will they use taxis, or will they share the journey with other private vehicle owners? Any one of these behaviours will reduce potential oil consumption. One of the key challenges for China’s government, as for other governments around the world, is to provide an efficient, comfortable and affordable public transport system for both urban and inter-city journeys in order to tempt people out of their cars. This will also reduce traffic congestion, itself an important cause of fuel waste as vehicles sit in traffic jams with their engines running.
Yet an alternative strategy for those individuals with substantial disposable income is to buy a small, fuel-efficient vehicles for urban use, but keep the large vehicle for out-of-town use. This approach would save fuel, but would boost energy consumption in the manufacturing sector as more vehicles are made and sold.
As and when China emerges from this economic slow-down, the confidence and spending power of the middle classes will grow again. It is critically important for the government to keep adjusting the price of oil products in line with international crude oil prices. Only then will the favourable trends evident in the first half of 2009 be sustained for the next decades. These new price and tax policies also need to be supplemented by continuing investment in public transport.
Philip Andrews-Speed is Director of the Centre for Energy and Mineral Law and Policy at the University of Dundee, Scotland.