Will China's gas prices reduce U.S. costs?

June 19, 2008 5:46:09 PM PDT
China says it's going to raise the price of gasoline and diesel fuel sold in that country. The government has been holding down fuel prices with subsidies that are now costing the Chinese government tens of billions of dollars a year. So how does that affect us?

Gasoline takes a big jump in China and Chinese consumers aren't happy about that. It could potentially eat into the demand for oil that's been driving up prices in the U.S. However, experts say the key word in that scenario is "potentially."

The demand for oil in China has been going up faster than any other country on the planet -- four times faster than India and 65 percent faster than the U.S. It's a demand that has been fueled by very low prices.

While U.S. consumers pay more than four dollars a gallon, in China it's $2.49. While the price of gas has gone up 77 percent this year in the U.S., in China the government has held the increase to just nine percent.

Donald Straszheim, vice chairman of Roth Capital Partners, is an expert on China's oil and energy issues. He says the subsidy of fuel is costing the Chinese government $40 billion this year.

"That is between five and six percent of China's total federal budget. That's a big number," says Straszheim.

Straszheim says China's decision to reduce its subsidy and effectively raise the price of fuel by 20 percent will contribute to inflation problems in China, and perhaps more electric scooters, but it won't significantly help lower the world price of oil.

"It's quite frankly not large enough to have any material effect on energy markets in America or around the world," says Straszheim.

On Thursday, the world price of oil dropped by nearly five dollars a barrel and Straszheim says that's not because of China. However, Professor Severin Boresnstein, Ph.D., the director of U.C.'s Energy Institute, says China's decision is a hopeful sign.

"The hope is that this will spread because there are a lot of countries that charge prices for gasoline that are well below the real cost of it in terms of the world price for oil," says Borenstein.

Borenstein says if Mexico, Venezuela and Indonesia also cut their subsidies, it could have a significant impact.

For that matter, if U.S. motorists cut back even a little...

"If the United States could raise the fleetwide fuel economy for our cars and trucks by even one mile per gallon that would actually have a bigger effect on the worldwide consumption of oil than the price change we're talking about today in China," says Borenstein.


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