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China's Thirst for Oil (and Cancer treatments)

More on Oil and China, this time from an interesting NYT's article from last week:

One of the reason's China's Oil demand remains so high is price controls and subsidies. But there's only so long that can go before market forces re-assert themselves. Keep pries articifically low, and (surprise!) you get shortages:

"Service stations across China are starting to run short on diesel this spring, while electricity blackouts here in southeastern China are growing worse as power stations cut back on purchases of fuel oil.

For truckers and factory owners, the diesel and electricity shortages are a nuisance, sometimes a costly one. The Guangzhou Boaosi Appliance Company, which makes refrigerators here, is without electricity from the municipal grid four days a week, and just bought a costly generator last month to continue operating on diesel.

The diesel and power shortages have one thing in common: they are largely the result of the clash between China's Communist past and its increasingly capitalist present. The government has set retail prices too low for diesel and electricity. So businesses, facing high world oil prices, are supplying less of both.

Disruptions in Chinese markets for fuel oil, diesel and other oil products are causing ripples in global markets in turn, as traders and investors around the world struggle to interpret the effects on international oil supply and demand.

. . . Sinopec service station had signs on all its diesel pumps saying they were sold out of fuel, though the gasoline pumps were still flowing. A couple of trucks loitered nearby. In contrast, lines of trucks waiting for diesel have been reported at scattered service stations elsewhere in China over the last few days.

The Chinese government raised the regulated retail price of gasoline by 7 percent on March 23, to $1.66 a gallon. But it left diesel unchanged at $1.57 a gallon to avoid antagonizing farmers, who need a lot of diesel in their tractors for spring planting."

Chinese Energy Subsidies

How Chinese households, factory owners, farms, small businesses and refinery managers will respond when Central Communist Planners eventually allow prices to trade freely is anyone's guess.

But its only a few months away -- "Government officials have already announced that they will raise retail electricity prices for industrial users, although probably not homes, on May 1. An increase in diesel prices is also widely expected."

That's a very significant development -- much more improtant than the worthless plaititudes we hear from Saudi Oil Minsters, who every month, announce increased production targets and every month, fail to increase production.

I disagree with this assessment -- all central planning has done is manage to forestall the pain, or rotate it to someone else who is not directly benefittingfrom the subsidy:

"But blackouts have been a serious problem for years here in Guangzhou, the biggest city in the Pearl River Delta, and they are worse this spring as oil-fired plants have shut down, though coal-fired power plants have kept running.

Diesel generators have become a necessity for factories across much of China in the last few years, as electricity demand has soared past supply, and they have helped turn China into the world's second-largest oil importer, after the United States. Factories receive priority in diesel shipments, and 19 representatives of companies from across China said in separate interviews at the trade fair here that they had not had trouble buying enough diesel to refill their fuel tanks periodically.

China's growth has been so full bore now that one has to wonder what seeds they are planting for problems in the future. The Times notes that central planning has questionable advantages for China:

"Sweeping aside environmental, land use and financial hurdles that can delay power stations in the West for years, China has embarked on a binge of construction of new power plants, many of them coal-fired . . . Yet the generators are costly in many ways. The diesel alone costs two to three times as much per kilowatt generated as electricity from power plants, managers complain, and on top of that are labor costs for maintenance and operation as well as the cost of the generator and the cost of space to put the generator and its fuel tank.

The generators, particularly older, domestically manufactured models, also rank among the biggest polluters in a country with some of the worst air pollution."

Interesting issues. Between all the cigarette smoking in China, and the huge air pollution issues they are developing, we should expect a bountiful Asian market for cancer treatments in the future.

No, that was not sarcasm. I am dead serious about this. Its not just the retiring baby boomers that makes health care so intriguing an investment arena. As long as US companies can protect their patents -- or make drugs so complex to manufacture that they cannot be readily copied -- than Genetech, Amgen, Pfizer, Imclone and many others will have a huge market to sell into over the next few decades.   

You read it here first.

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Source:
The Great Engine of China Is Low on Fuel
KEITH BRADSHER
NYT, April 19, 2005
http://www.nytimes.com/2005/04/19/business/worldbusiness/19energy.html

Wednesday, April 27, 2005 | 01:30 PM | Permalink | Comments (2) | TrackBack (0)
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Comments

That's actually a pretty interesting assessent of Chinese growth and processes - we have a country desperately trying to keep control of market forces that simply refuse to remain controlled.

IMO it's not so much the market forces themselves at work in China's rampant industrialisation that are the focus to watch, as much as it's currency and exchanges.

The country is being pushed on greater foriegn ownership, revaluation of the renminibi, as well as the possible merger of the Shanghai and Shenzhen stock exchanges. More on those here:
http://www.financemarkets.co.uk/category/currencies/

Overall, these issues will leave the Chinese truly at the mercy of market forces in a way that should really cause concern - not least because you are quite right that despite the hold of central planning, the decisions made now are going to have a really serious effect on the future - and in this future, the state will have little remedy to overturn some of the potentially more hasty decisions made during it's rapid industrialisation.

Posted by: Finance Marketer | Apr 29, 2005 7:28:11 AM