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For all its pains, energy price hike a wise move

By Ma Hongman (China Daily)
Updated: 2008-06-26 10:21

[The author Ma Hongman is an anchorman with China Business Network, a TV network based in Shanghai.]

Last Thursday, the National Development and Reform Commission (NDRC), the country's economic watchdog, announced the rise in prices for gasoline and diesel by 1,000 yuan ($144.9) per ton and the price for aviation kerosene by 1,500 yuan ($217.4) per ton from June 20. And from July 1, the price of electricity will also be raised by 0.025 yuan per kilowatt.

The unexpected energy price rise by the NDRC has significant influences on all market players. More importantly, its effects on the economy in the short term differ dramatically with those in the long run. Therefore, a detailed analysis is worthwhile at this moment.

Energy price is closely related to prices of nearly all commodities, hence key to the economic soundness. An energy price rise is sure to drive up the Consumer Price Index (CPI) growth instantly and would likely strengthen the inflation expectation.

However, when the energy price is subject to the market rule instead of the administrative price intervention, it would help ease the shortage of supply against demand and improve the efficiency of macro economic policies. Therefore, this price rise is a benefit viewed against the long-term prospective.

After this energy price rise was announced, the research departments of prestigious investment banks predicted that it would bring the CPI growth in the later half of 2008 up by 0.4 percentage point, driving the annual CPI growth above 7 percent.

Compared with the 4.8 percent growth in CPI expected by the policymakers for the year, this possible change in the inflation indicator will intensify the pressure for economic policymaking. It is also going to worsen the market worry that the economy would be threatened by inflation.

But all these negative conclusions only remain valid in the short term. A pricing scheme for refined oil products decided by the market is an inevitable trend in the long run. Price control would always produce more devastating consequences upon the economic soundness than returning the power of pricing commodities to the market.

In the market economy theories, one of the cornerstones is to respect the role of price in the market, because it is born as the most sensitive and effective element to balance demand and supply. Its change would directly encourage or suspend demand, which would, in turn, improve or distort market structure.

In the face of such a natural tool for balancing the market, any macro control policy might have problems in what to choose from the policy tools and how far to push them. And it is also a frequent result that the economy evolves in the opposite direction from the policy targets.

When it comes to the specific issue of energy price in China, price rises on the domestic market could not be avoided although the timing of such a rise should be chosen with prudence.

When the administrative department imposes a ceiling on the price of refined oil products, one of its key targets is to try to prevent the industrial users of energy from cutting their energy demand and reducing their supply of consumer commodities. But when the ceiling is lower than reasonable, it would depress the supply.

Pressured by the financial burden from low price, the oil refiners either stop their manufacturing, or limit their output. The reduced supply has the same effect in raising the demand costs with lifting the price.

It is not rare that drivers have to go to several gas stations to get enough gasoline for the gas stations portion their limited supply of fuel to every driver. Some car-owners even stop driving for the difficulty of getting fuel. When the small consumers of energy products like family car owners feel the pressure of energy shortage, it is not hard to imagine the trouble the industries face.

Yet, a low energy price, thanks to price control, encourages energy-intensive industries. In a sense, the administrative subsidy to the oil refiners to maintain their low price has become an incentive to the energy-intensive manufacturers.

After the price of agricultural produces slows its growth, the prominent driving force of inflation in China becomes the price of energy product on the global market for the country's heavy dependence on imported crude oil.

When the Chinese authorities try to let the market set prices for energy products, it also has a global significance: the crude oil futures traded on the New York Mercantile Exchange dropped more than $4 per barrel upon China's release of the oil price hike. It could be a clue to the long-term benefits for the global energy market balance.

Oil price rise might cause some immediate pressure or trouble, but a respect to the law of market economy would definitely promote smooth economic growth in the future.