Gas Lines in China: “Déjà vu All Over Again”

Chinese Gas StationAs we drove through Jiangsu Province the other day, passing endless lines of truck drivers waiting patiently at service stations for their ration of diesel, I couldn’t help but think of Albert Einstein. I believe it was Einstein who said that the definition of insanity is doing the same thing over and over again and expecting a different result. The Chinese government is now learning what numerous other governments before it have learned: price controls don’t work and always result in shortages.

In order to minimize the impact of upward spiraling oil prices on its fuel-thirsty, industrial economy, the Chinese government has been controlling the prices of gasoline and diesel fuel that its oil companies can charge at the pump. The problem is that the price of crude oil on the open market has been going up faster than the Chinese government has been willing to raise the price that the consumer must pay. Because the nation’s oil companies are effectively losing money on every liter they sell under this arrangement, they are doing what every other oil company has done under similar circumstances–they are curtailing production. In China, of course, they can’t really say that they have stopped production because they are losing money. Instead, the official explanation is that the refineries are “closed for maintenance.”

Whatever the reason given, the effect is the same–a shortage of fuel. Trying to please everyone in the face of these shortages, the country’s service stations have been limiting purchases of diesel to 100 yuan per customer. Not wanting to run the risk of running out of fuel, every driver keeps his fuel tank full—hence the long lines. Drivers simply stop at every station they pass in an effort to top off their tanks with another 100 yuan purchase.

The lines of trucks in Jiangsu reminded me of the gas lines that I sometimes had to sit through in the United States after President Nixon instituted wage and price controls in 1974. Price controls on fuel, no matter the place and time, always result in shortages in both the short and long-term. In the short term, drivers do what the Chinese drivers are doing, they keep their tanks full. As a result, short-term inventory requirements increase substantially. Over the long term, price controls provide an artificial incentive for increased consumption because consumers are not required to pay the true cost of what they are purchasing. At the same time, producers are discouraged from increasing production because they cannot get a fair price for their product.

Thankfully, the Chinese government has seen the light. A draft energy law, now being circulated, proposes a market-led pricing system which would allow refiners to adjust product prices according to supply and demand. As China continues to industrialize and demand for energy grows, the last thing the country needs is an energy policy which does not accurately reflect the cost of energy in today’s markets. If passed, China’s new energy law would be the first step toward an overall energy policy which China needs to address one of the major issues facing the country today–the continued availability of fuel to feed its growing economy.

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