China Cuts Subsidies, is a Pullback in Oil Next?

I have talked a little bit over the last several weeks about my thoughts on speculation in the oil market and the very real supply & demand imbalance that exists.  While it is clear that oil consumption in the U.S. is beginning to slow the main driver in the increase in the price of oil and other commodities over the last several years has been the ever-increasing level of consumption in the developing world.  China’s consumption of oil alone is probably one of the most important factors in the oil market right now.  That is my I was fascinated by Thursday’s announcement that the Chinese government was going to increase gasoline prices by 17%, diesel prices by 18% and jet fuel prices by 25%.  Other types of fixed energy prices will also be increasing as the Chinese government attempts to fight runaway consumption and an overheating economy.  

Such an action could cause a short-term reversal in the energy markets that could potentially be exasperated by all the fast money that is currently awash in oil contracts.  In the long run, Chinese growth will likely overcome any decreases in consumption that is tied to any further increases in the price of gasoline.  As a result, I would be a buyer of oil and gas related sectors on any significant pullback.     

The Chinese government’s announcement is tied to the fact that it subsidizes the country’s energy expenses.  Many countries worldwide subsidize their gasoline prices and as a result, consumers in these countries do not have the same incentive to conserve that consumers in the U.S. and Europe have.  When consumers do not have to pay higher prices, due to artificial price controls, consumers will not conserve and as a result we are all worse off.   That is why the move by the Chinese government should be applauded as it is forcing the Chinese consumers to begin to start to pay for the replacement cost for the products that they use.  Below is a little chart I stumbled across on the various degrees of gasolines subsidies across the world.  It is rather interesting and shows how many other countries will need to either end or reduce subsidies before any global slow down in oil consumption can even be considered.