Ushering In The Post-Hummer Era: Chinese Fuel Price Subsidies To Blame For High US Gasoline Prices

US politicians are probably going to pull China into the US election debate over gas prices. But, that will miss the real fulcrum of guilt as well as overlook the consequences of a hoped-for return to cheaper transportation fuels.

Chinese government subsidies of liquid transportation fuel pricing figures centrally in a global oil "demand shock" that is the very opposite of the "supply shock" responsible for the oil crisis of the late 1970s. A report from the International Energy Agency points out that these subsidies are a central factor behind the steep run up in oil (and gasoline) prices.

The US political "scapegoats" list for expensive gasoline currently starts with profits of US branded oil companies and ends with 'environmentalists' refusing to let them "drill our way out" of the shortages. As it turns out, however, the root-cause traces back directly to economic policies of the nation that makes cheap goods for the world: China. Follow the chain of causation still further and it leads to Organisation for Economic Co-operation and Development (OECD) nations empowering China's economic growth for the last two decades. Thus, we have encountered the real scapegoat, and "it is us." 'Subsidized Chinese demand for fuel is a central force behind a major change in the US lifestyle: Americans are at last turning to small diesel cars, the International Energy Agency (IEA) reports'

[And]...the current energy squeeze was fundamentally different from the oil crises of the 1970s and 1980s because it was driven by a "demand shock" rather than supply factors.

In its monthly assessment of trends in the oil market, the International Energy Agency, an offshoot of the OECD, explored whether high prices might lead to "demand destruction."

The IEA said that this "will depend mostly on whether China and the Middle East, which account for almost three-quarters of global oil demand growth, substantially modify their administered price regimes," a reference to subsidies.

US oil demand was expected to fall by about 2.5 percent to 20.3 million barrels per day in 2008..."Indeed, the US seems to be entering a 'post-Hummer' period -- the gradual switch away from SUVs and light trucks to smaller, more efficient vehicles, largely prompted by the perception that oil prices will remain high."

...Short-term growth of demand for oil would come only from countries with strong economic growth and where consumers were protected by subsidies, which meant essentially oil-producing countries, China and some big countries in Latin America.

..."However, only China has arguably the financial might to sustain subsidies, and could thus be able to delay any price adjustment even if international prices continue to rise," the IEA said.

"Despite all the hype generated by the recent adjustments of administered price regimes in the region, only a large price adjustment in China has the potential to significantly alter the demand picture."

The EIA fuel price analysis discussed above begs the larger question of whether Tree Huggers want to see OECD-nation transportation fuel prices recede to 'pre-shock' levels.

Should China be told to stop subsidizing transportation fuel? Not if we wish to transition well past the Hummer Era. Not if we want climate action to be driven in the US primarily by "free market forces" (which are anything but free, given the Chinese government's regulatory hand in this).

Of course, the USA could take the alternate route of signing onto a Kyoto Convention-like regulatory regime that results in higher fuel costs, or at least of passing a rigorous Cap and Trade law, and use either of those steps as the foreign policy basis for arguing that China should stop subsidizing fuel. But, that choice will have to wait for next year.

Via::SpaceMart, Car Edition, Chinese hands help push Americans into small, diesel cars: IEA Image credit::IEA Oil Market Report Graphics, excerpts