China’s fuel issues
China’s fuel issues
Published: November 28 2007 08:58 | Last updated: November 28 2007 19:06
Foreign car company executives dream of hundreds of millions of new vehicles taking to China’s roads. But the big consumer of oil in China is heavy industry, accounting for almost 40 per cent of the total, compared with just 30 per cent for transport. The US, in contrast, burns more than half its oil in vehicles.
China’s currency peg, which curbs appreciation against the dollar, is often cited as a reason for runaway fixed investment in the country’s exporting industries. Yet fuel subsidies are also important. Even after a recent increase in regulated prices, domestic diesel is 20 per cent below market rates, according to Lehman Brothers.
Shielding Chinese industry from surging global oil prices removes incentives to increase fuel efficiency. Energy intensity per unit of economic output has actually risen again since 2001, as investment has shifted towards heavy industries. Add fuel subsidies to the currency peg, cheap labour and light planning regulation, and the incentive to expand capacity willy-nilly is overwhelming. For example, it is estimated that China now has about 7,000 steel companies, yet the top three account for just 14 per cent of domestic production.
Beijing fears big rises in regulated fuel prices would alienate the masses, and might not subdue industrial fuel consumption that quickly, if Chinese banks continue lending freely.
Ultimately, subsidies are not sustainable. Buoyant Chinese demand boosts global oil prices. Without sudden supply increases, demand has to be hammered in countries without subsidised, regulated prices, if the market is to balance. If the latest forecasts from the International Energy Agency are anything to go by, that is happening in the industrialised world – precisely the destination for all that Chinese export capacity.
Copyright The Financial Times Limited 2007
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