There is a nice article in the China Daily on government’s efforts to establish price controls to keep natural gas prices in check. The problem – rising prices of liquefied natural gas. The solution – introduce the legislation strengthening price controls. The result –
…government efforts have not stopped gas prices from soaring. In Guangzhou the cost of a 15-kilogram bottle of LNG has risen to 115 yuan (US$14) from 95 yuan (US$12) since the beginning of this year. Worse, a shortage of bottled LNG has become a pressing problem for many cities in South China. Local retailers are reducing their supply to minimize losses as rising wholesale prices cancel out almost all of their profits.
In free market economies where prices are allowed to adjust to equate supply and demand of goods and services, price controls lead to shortages because entrepreneurs would not sell goods and services at a loss. Remember the oil crisis in the United States? So what can you do when you have price controls in place and face shortages? Well, the government could just subsidize the firms to make up the difference in price. This is what was done earlier in China.
At that time it was the unprecedented long queues of cars at empty pumps that shocked the pricing authorities into taking action. Large State-owned oil companies were banned from exporting and urged to increase the domestic supply. The oil panic was resolved, but at a dear price. Simply compensating for the “loss” a domestic oil giant suffered by selling oil at home for less than international prices cost the government more than 10 billion yuan (US$1.2 billion).
But who is really subsidizing firms in such cases? The government? Well, it can’t just print money at will (inflation) so it has to get money from somewhere. So, if its not the government that pays for subsidies then it is…the consumers, who pay taxes and buy goods and services to keep firms afloat.
The author does provide a solution. Free the prices, let the market allocate the natural gas to consumers who value it the most, and provide some subsidies to low-income families.
Policy-makers’ attempts to resist the upward pressure soaring international energy prices exert on domestic energy prices is understandable. The effects of a substantial increase in energy prices will be felt in every corner of the national economy, but many sectors are far from prepared.
It is true the impact of energy price adjustments will be felt unevenly by various groups. It will also take time for all of these groups to absorb the energy price shock. But that is not an excuse for delaying necessary pricing reforms. To facilitate such reforms, government support should first be promptly delivered to the underprivileged.
That six provinces in South China have recently adopted temporary fuel subsidies for low-income families is a positive step towards adapting local economies to rising energy prices. If the country is to accept higher energy prices as a precondition of making the economy more energy efficient, the government should set aside more of its support for those that are more vulnerable to such price hikes.
Seems like a reasonable solution to me.
Published Date: January 24, 2006