If you think the United States is encountering some serious economic strains from today's skyrocketing global crude oil prices and soaring gasoline costs, consider what China is facing.
Yes, China's increasing appetite for petroleum is part of the reason that global crude oil prices are at record highs. Yes, Chinese motorists are paying only $2.50 a gallon for gasoline, not $4 a gallon. Yes, Beijing is striking deals with oil-rich dictatorships to ensure long-term oil supplies, often offering them trade concessions and military aid.
But China is facing one big problem the United States won't have to surmount this time as it moves to adjust to more costly petroleum: Beijing is going to have to pare back its enormous energy subsidies and fuel-price controls. And in the long run, that might prove more painful than anything the United States will go through.
Like many emerging-market countries, China is rife with government controls on energy. Its oil industry is run almost entirely by the state, which imports crude at global prices and sells it at a discount to state-owned refineries. Gasoline prices are rigidly controlled; they've risen 9 percent since early 2007, compared to 80 percent in the United States.
Fuel-price controls might have seemed fine when oil prices were lower, but the recent price surge -- to nearly $140 a barrel -- makes it almost impossible for China to sustain them. If Beijing keeps fuel prices low, it risks seriously draining its foreign exchange reserves. If it lets prices soar, it risks worsening inflation and more political unrest.
"China is now in a terrible bind," says Harald B. Malmgren, a former U.S. economic official who watches China closely. Demand for oil is certain to soar as China's economy matures and more people buy cars. "Even now, gas stations in China are shutting down," he says. "They can't make money with prices controlled."
Indeed, China's major cities already are experiencing serious shortages of gasoline and diesel fuel for trucks as oil companies cut deliveries to local service stations in the face of soaring global oil prices. Many service stations now are open only a few hours a day. The result: long lines of motorists and truckers waiting for a turn at the pump.
Moreover, the Chinese are reluctant to ease fuel-price controls anytime soon for fear of exacerbating the country's worsening inflation rate, which already has hit 8.5 percent -- the worst performance in 12 years. Chinese President Hu Jintao has declared fighting inflation the government's no. 1 priority.
The United States suffered through a bout with fuel-price controls during the 1970s, when price ceilings and rationing were imposed. The result was acute shortages -- and long lines at the pumps. It was only after controls were lifted in 1981 that Americans cut consumption. Oil prices fell, and the queues disappeared.
In China, the downside of the price controls was masked by the country's heady 10 percent annual growth rate, continued low inflation, and lackluster demand (because so few people had cars). Global oil prices rose but not all that rapidly. Now all that is changing. China's growth is slowing. Inflation is accelerating. Autos are proliferating.
That timing might seem unfortunate. The fuel-price crunch "is hitting the Chinese at a much earlier time in their development than it hit the United States," which was able to enjoy almost limitless cheap energy supplies as it grew, says economist Albert Keidel, an Asia specialist at the Carnegie Endowment for International Peace in Washington.
At the same time, Keidel says, "conservation for a country such as China might be easier because it's just developing its infrastructure." The United States already has built itself around autos, eschewing the kind of mass transit systems that might have checked demand for gasoline. Beijing still has time to act before that happens to China as well.
To be sure, China can maintain its price controls for a while. The government has accumulated $1.5 trillion in foreign exchange reserves -- most of it dollars --to help subsidize its prices. But even that can't last forever. Some estimate that if oil prices stay at $120 a barrel, the subsidy will cost China almost $30 billion a year.
But ending the current fuel-price controls would have enormous political and economic costs. Even a modest phasing-out would cause substantial pain for ordinary Chinese, spur higher inflation and probably impede economic growth -- not what you want to do just before the Olympics, or even after the games end.
Americans are bigger gas-guzzlers than the Chinese, but we've never had long-term fuel-price controls, so we can adjust more easily to price surges. Indeed, new figures show that a growing number of U.S. drivers already are switching away from trucks and SUVs toward hybrids and other high-mileage vehicles. Many are driving less.
As for blaming China for high oil prices, the United States still guzzles more oil and gasoline than anyone else; Americans pay less for fuel than motorists in many rich countries; and we've been consorting for years with repugnant dictatorships in order to ensure our access to the crude oil supplies that they control.
At least we don't have price controls.
This article appeared in the Saturday, June 14, 2008 edition of National Journal Daily.
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