Friday, June 20, 2008

One Reason For High Oil Prices

From IBD:

Oil prices swooned after China's National Development and Reform Commission said it will hike the price of gasoline, diesel, aviation fuel and electricity.

The Chinese government lifted fuel prices by 11% in November but had kept them frozen at that level, part of an effort to avoid boosting already-high inflation rates.

Chinese gas prices are well below the levels seen in the U.S. and other nations, thanks largely to heavy subsidies. The government said it would lift some of those subsidies, effectively boosting prices by as much as 18%.

Scorching demand in China for refined crude products has been one of the biggest drivers of the global surge in crude prices. Thursday's announcement of higher prices in China sent the price of U.S.-traded crude oil falling sharply. July crude dropped $4.75 to $131.93 a barrel.

Keep prices at an artificially low lever and you'll also keep demand at that level. Raise prices by removing the subsidy and you'll see demand drop.

The interesting question is why is China doing this now? They have more than enough currency reserves to maintain the subsidy for the foreseeable future. In addition, they have experienced a fair amount of civil unrest lately which this decision is not going to help. Finally, this is right before the Olympics which many people are speculating Beijing will use as its official "coming out" party on the world stage. So, again, we ask the question: why now?