Price Controls Suck (the Yuan from the People's Pockets)

The United States (allegedly) goes to some extreme lengths for its oil. China is no stranger to these sorts of extremes. But only one of these countries has price controls on its petrol, and the People from that country pay more for petrol out of the pump than the country waging a war in the Middle East. (Sure, I prefer the colonial term "gas," but gas more accurately describes natural gas and that's a whole other story)

The biggest loser of China's price controls is its flagship company, PetroChina, which once had a "surreal market capitalization of just over $1 trillion, a figure roughly equal to the economic out of India," China's greatest weapon in the battle (in the eye's of observers from developed nations) for the king of the BRIC stack. Yesterday, an article at BusinessWeek, The Squeeze on PetroChina, explains the impact of the petrol price controls on PetroChina. Under "orders to subsidize fuel prices for consumers," PetroChina is selling petrol and diesel at a price that "reflect[s] $60 a barrel for oil, not $100 a barrel." The direct impact on PetroChina is obvious: even with robust profits on the global oil trade, 2007 growth in net profit is expected to be over 2% lower than the previous year. This is partially reflected in PetroChina's share values which "have fallen 40%-plus over the last four months."

The United States, without direct price controls, has lower gas prices than China. Are these price controls limiting incentive for innovation in business, systems and exploration, and limiting incentive for investors to invest in PetroChina? Or are the indirect price subsidies in the U.S. keeping our gas prices lower? Tax breaks for oil companies in the U.S. add up to about $18 billion per year which is almost equal to PetroChina's expected 2007 net revenue of $22 billion.

On a related note, China does the exact same thing with their coal.

On an unrelated note, G-7 countries are calling for an end to oil subsidies in China and India.