An Opportunity to Test an Hypothesis

Richard Spencer in Beijing writes that “the petrol crisis sweeps China” in today’s Daily Telegraph. The panic buying is setting in, the rumours spread and the choice is: ration by government order or raise prices:

“The crisis began last month in Guangdong province, home to many of the country's vast new factories. Within a few days of reports of petrol shortages, queues half a mile long had formed. Sinopec and Petrochina, the two state oil giants, publicly blamed the typhoon season. But their complaints to the government about its pricing policy were soon leaked. These oil firms are, like all key national industries, state-controlled. But under reforms, they are supposed to behave like real companies. They complained that the price restrictions meant that the more petrol they delivered to the pumps, the more money they lost.“Shanghai was next in line, and this week it was Beijing's turn to be hit, though once again, the companies publicly cited "technical and logistical reasons".Local newspapers reported that 60 stations in the Beijing area had stopped selling 90-grade petrol, used by most small cars and taxis, since July.”
(Daily Telegraph, London, Saturday 17 September)

China seems inclined to continue setting a price cap below the risen world price (they were $20 a barrel below the world trading price at $60 a barrel).The price should rise advocates would predict decreasing shortages and a speedier adjustment period; the ration ‘fairly’ advocates would predict fairness amid the shortages (but probably not enough petrol).

China, widely seen as the cause of the rising petrol price, is an ideal place for an experiment in which remedy is best, or at least better, than the other.

In Smithian terms, world ‘market’ prices have risen above ‘natural’ prices; if this ‘gap’ is prolonged in a separable entity, shortages will result. Even if ‘panic’ buying did not makes matters worse – exhortations not to ‘fill up’ are usually ignored, indeed, are promoted by the act of exhortation – there would still be a tendency to shortages appearing because the incentive to conserve use of the good is muted.

If prices are allowed to move upwards (the higher and faster the better for provoking drops in the quantities demanded to materialise), conserving what petrol they have or can obtain will set in, substitutes for using petrol (or more correctly using motor vehicles will spread) and on the supply-side incentives from the higher profits will induce searches for alternative fuel systems.

Will this happen in China? Not clear just yet. The Chinese political bureaucracy is as capable as stubbornly sticking to its non-market instincts as their equivalents in the West. But China is also a place of surprises and the elite has shown itself capable of abandoning its failed Marxist model when opting for a dose of managed price freedom. Then the interesting consequence would be that the communist elite would show those in favour of rationing, or holding prices below world prices, in capitalist US/UK/Canada/Australia and New Zealand how to do it!