Any country pursuing economic liberalization could learn much
from America’s successes. But these days, China might learn more
from America’s failures.
In the booming southern coastal region of Guangdong, energy
price controls have forced truckers to wait in long lines for
diesel fuel. The Chinese government forces oil refiners to sell
their products at prices well below what it costs to produce them,
so the refiners have cut back production capacity, resulting in
long waits at the pump. “Oil futures are near $100 [a barrel], but
the price we sell at is only $60. We are still losing money,” an
executive of the Chinese energy company Sinopec told the Wall
Street Journal last month.
For 17 months, PRC planners kept Chinese oil prices fixed, while
the true market cost of oil skyrocketed. Now, thankfully, the
government seems to have gotten the memo. At the beginning of
November, the PRC raised fuel prices by roughly 10 percent, in
hopes of ending the shortages. It helped, but only allowing prices
to return to market levels will restore a healthy equilibrium of
supply and demand.
The PRC’s policies have precedents in America, and they’re not
pretty. In 1973, the oil crisis induced the U.S. government to pass
oil price controls, which most Americans knew better as a system of
gas lines. Then in 1979, the Iranian revolution disrupted world oil
supply for the second time in a decade, creating another big spike
in prices. U.S. President Jimmy Carter instituted price controls
again, resulting, as before, in long lines at the gas station.
Drivers waited hours to fuel up their cars, often in lines
hundreds of cars long. In the state of Maryland, governor Harry
Hughes proposed an odd-even system of rationing, under which cars
with odd-numbered license plates could gas up on odd days, and cars
with even-numbered plates gassed up on even ones.
It was bizarre, and it sure wasn’t popular.
And of course once the government gets started controlling
prices and rationing scarce goods, it’s hard to stop it. It didn’t
take PRC planners long to recognize that the price controls were
hurting their own oil companies, but instead of allowing them to
charge what the market would bear for the products, they tried to
compensate the companies for the losses. And so the lunacy of the
controls compounded itself.
“The government forces state-owned or state-controlled firms to
absorb losses that analysts say are now running at up to $10 a
barrel on imported crude,” John Ruwitch wrote recently in the
International Herald Tribune, so “for the past two years
[the PRC has] also doled out hefty year-end compensation to
Sinopec, the worst hit.”
Sinopec controls about 80% of the Chinese market for refined
petroleum products, and China Daily reports that in 2006,
the bailouts cost the government more than $1.2 billion. So the PRC
essentially forced consumers to pay for the inconvenience of
waiting in lines.
The Chinese government knows how much it paid out to aid ailing
firms, but it’ll never really know how much harm it dealt the
overall economy. In May 2006, the Chinese government allowed
gasoline prices to go up by 10.6 percent, and diesel prices to go
up 12.3 percent. No doubt governing bodies made those decisions on
the basis of some economic analysis, but as anyone familiar with
the laws of economics has to wonder, what did these economists know
about demand that the consumers themselves didn’t?
Spiking prices often aren’t pleasant, but they’re not the end of
the world, either. As my colleagues Jerry Taylor and Peter Van
Doren point out, in the last week of September 2003, oil was
selling in U.S. spot markets for $23.86 a barrel. Four years later,
oil prices are four times higher, but the inflation, unemployment,
and recession that supposedly follow oil price shocks are nowhere
to be seen.
China’s Communist Party has staked its legitimacy on the ability
to continue delivering economic growth at what, by historical
standards, is a blistering pace. Party officials seeking to
ameliorate popular discontent no doubt want to shield ordinary
folks from spiking prices, but like them or not, market prices are
a reality.
Allowing prices to rise and fall as they will in the market can
actually relieve pressure on governments. Scarce goods are scarce
goods, and even an all-powerful party can’t control everything. By
recognizing certain adversities as facts of life, a government can
absolve itself of the onus of having to put an end to them. Because
putting an end to them sometimes creates bigger adversities in
other departments.
Richard Nixon and Jimmy Carter could have stood to learn that 30
years ago, and China’s leaders could learn from their mistakes
today.
David Donadio is a writer and editor at the Cato
Institute in Washington.
