The Petroleum Energy in China - Assignment Example

The Petroleum Energy in China Introduction In the year 2009, China implemented a reserved transformation onthe taxation factor in fuel and this led to an increase in the gasoline consumption from approximately 0.3 Yuan per liter to 1.1 Yuan per liter. Despite its comparatively least impact, the fuel tax transformation contrary reveals that the government of China has a determination to control the high consumption of gasoline in the country. The steady rise in gasoline consumption has triggered some alert on the concerns of local pollution, oil security and global warming plus other impacts that are not yet mentioned in this article. This paper will concentrate on the price and the income elasticity for gasoline in the state of China. It is appropriate to understand the connections among the gasoline price, the gasoline demand and the non-refundable income as this knowledge will help in the evaluation and examination of the effectiveness of China’s tax transformation. The tax transformation focuses on decreasing the gasoline consumption due to its hazardous impacts such as pollution and global warming and it has various useful implications for the energy statue in consideration (Jiang & Zemin, 103). Even though the domestic fuel prices in China undergo regulation by the government through the responsible department, the prices are always revised quite often in accordance with the world oil prices and due to that, the diesel prices and the gasoline prices tend to follow or rather comply with the world oil prices. The price of gasoline was first moderated in the year 1993, and then in 1994, 1998, 2003 and in 2009 with the implementation of many transformations. In general, the administration or the government usually erects a foundation of price of the crude oil on a non-uniform basis according to the weighted accumulative price change of various international exchanges such as the Minas, the New York, and the Brent. There are two main oil companies in the State of China namely the China Petrochemical Corporation and the China National Petroleum Corporation are given the mandate to set the ex-plant prices that are the wholesale and retail prices. The two corporations sell to the provincial petroleum companies who in turn forecast the retail service joints. The prices charged at the joints or rather stations are set to mitigate between a rate of 8% band and above and below the set standard prices. Given the price mechanism, the nominal retail gasoline prices increased at a steady rate making the annual growth rate to be approximately 3.50 percent (Jiang & Zemin, 122). This clear indicates that the standard gasoline price rose from an average yearly growth rate of 0.94 percent. In China, the growth rate of total gasoline consumption and the gasoline consumption per capita are extremely high and the same in magnitude to the average real Gross Domestic Product growth rate of 7.5 percent to 10.5 percent in the economy of the country. The entire gasoline utilization rose from 27.80 million tons to 83.91 million tons with an average yearly growth rate of 9.30 percent. Definitely, the gasoline consumption per capita rose from 23.20 kilograms to 62.85 kilograms making the yearly growth rate of 8.60 percent. In the year 2008, the gasoline motor consumption in China was approximately 1450 thousand barrels on a daily basis and was in position two internationally after the United States of America whose gasoline consumption was approximately 8990 thousand barrels on a daily basis. This was an intense contribution to the approximately 7 percent of the world’s consumption. However, the per capita consumption was still least at 0.4 barrels annually in comparison to the values in the United States of America, Africa, Japan, and the international average of 1.2 barrels on an annual basis (Jiang & Zemin, 204). Even though the per capita consumption is least, the far above the ground consumption growth rate illustrates an extreme potential for the gasoline consumption or rather usage growth in the near future. There is also a concept that analyzes the consumption of gasoline in China. The travels sector or rather the transportation and communication sector that entails the storage, the transport and the post is responsible for the greatest share that is approximately half of the total gasoline consumption in China with a 47 % total consumption in the year 2009. In the year 2008, the communication and transportation sector accounted for a 41 percent of the gasoline consumption. In the year 1998, the transportation department only was responsible for about 37 percent of the gasoline consumption in the state of China. By the year 2008, the sectors of communication and transportation rose to an approximation of 50.30 percent and there is an expectation of further increase due to the expectation of a rise in the personal or the private vehicle ownership in few years to come. The industry sector encountered an ultimate decline between the year 2000 and the year 2005 that was from 19.50 percent in the year 2000 to 9.20 percent in the year 2005 (Jiang & Zemin, 344). Research and studies clearly indicates that the greatest increase arises from the residential sector whose share increased from 6.5 percent to 16.20 percent and this was in between the years 2000 and 2009 (Lim & Tai-Wei, 43). The consumption of gasoline is on a steady rise because every occupant of China uses gasoline on the daily activities that in turn boost the economic growth and development of the country. The gasoline consumption by sector in million tones Sector 2000 2005 2006 2007 2008 2009 Agriculture 0.89 1.60 1.68 1.73 1.60 1.68 Industry 6.82 4.42 4.99 5.25 5.86 6.71 Construction 1.16 1.72 1.81 1.79 1.96 2.35 Transportation and communication 15.28 24.30 25.92 26.13 30.90 28.82 Commerce 0.70 1.29 1.23 1.32 1.35 1.48 Other industry 7.93 9.98 10.64 11.20 11.22 10.70 Residential 2.28 5.24 6.16 7.78 8.55 9.99 Total consumption 35.05 48.55 52.43 55.19 61.46 61.73 The estimation of the gasoline demand elasticity The data For an effective and efficient estimation of gasoline demand elasticity, there is a dependence on the aggregate fuel price and fuel usage data blended with the income data from the China statistical yearbook, the periodical oil economy in China and the China energy statistical year book. A statistical collection of data from various regions of China was useful in the calculation for the average gasoline consumption. The statistics will adequately provide information that will be relevant to the bureau of statistics in the energy sector. The collection of data was done in a manner that no mistakes were allowed in order to prevent misleading information. The theoretical framework should be well conversant with the field work. When the data is adequately analyzed according to the procedures in place, the final results would be perfect. A statistical collection of data from various regions of China was useful in the calculation for the average gasoline consumption. The statistics will adequately provide information that will tally the consumption of gasoline in China. The basic model For a relevant estimation of the gasoline price elasticity it at appropriate to begin with the basic double log model: ln Dit = β0+ β1 ln Pit + β2 ln Yit+εit …………….. 1 From the above equation Dit illustrates the per capita gasoline demand in tones for the geographic set up with the number of years being shown by the symbol t, Pit illustrates the actual price of the gasoline, the Yit is the actual per capita not reusable income in the year 2005and finally the εit represents the mean zero error term. Due to the element of data limitations, the greatest part of this study and analysis is operated using the yearly set of data (Lim & Tai-Wei, 87). Review of gasoline demand elasticity estimates for developing countries from previous research Price elasticity Income elasticity Country Estimation period Short run Long run Short run Long run Malaysia 1973-1987 -0.13 0.57 Pakistan 1973-1987 0.39 2.91 Philippines 1973-1987 -0.39 0.15 Sri Lanka 1973-1987 -0.34 0.82 Taiwan 1973-1987 0.024 0.81 Thailand 1973-1987 -0.30 1.77 Bangladesh 1973-1987 -0.35 0.016 India 1972-1994 -0.21 -0.32 1.18 2.68 Kuwait 1970-1989 -0.37 0.47 China 1980-1999 -0.19 -0.56 1.64 0.97 Oil and energy in China The Energy Security Obsession Among the most current occupations in foreign policy circles is the energy security. It is always challenging to find the actual meaning of energy security and the reliance on foreign energy. The state of China really struggles to be in a position to secure its resources in terms of energy reservation, as energy is the backbone of economic growth and development. This will help the government to prevent cartels that will control prices and make the prices of energy unstable due to constant fluctuations. Securing the oil prices is a mandate that that a government should put into practice in order to facilitate the economic growth and development. The oil usage is common in industries that produce majorly commodities that require a lot of energy to produce. This is because oil is relatively cheap thus great volumes can be affordable to the government of China. This will quickly trigger the development of projects that generate income to the country. The investment in such projects is ideal because in the long run there will be an ideal environment for constant economic growth and development in China. Oil is also useful in the shipping industry thus exportation of commodities will be cheap and as a result China will have great returns from such transactions. The cartels A cartel refers to an agreement among several producers to obey output restrictions in order to increase their joint profit. The cartel always plays the role of a monopolist and divides the market among members that make up the cartel. A perfect example for a cartel in the petroleum energy sector is the Organization of Petroleum Exporting Countries (OPEC) that was formed in the year 1960 in September. The cartels are always illegal in countries but in the case of the Organization of Petroleum Exporting Countries, the cartel is always made up of various countries (Wu & Kang, 45). China is really trying to be among the cartel of petroleum exportation since this will give it an upper hand in the utilization of opportunities that the countries exporting energy enjoy. Recently China is almost over throwing the economic stability of the United States since it is really investing in various states of the developing countries. The problem for the cartel is that each participant has an incentive to cheat the agreement. Assume that a participant deviates from the agreement by increasing production in one unit while the other participant does not. Therefore the profits for the deviating the participant, which in this case is China. Profit = TR-TC = (P-ATC)-Qi = (2.5-1.75)*2 = 1.5 This is greater than the estimated profits of 1.25 that a country would easily make under no deviation. The idea of forming a cartel greatly facilitates a perfectly competitive market. In this situation, there is an assumption that the number of countries is fixed. Eventually it will be noted that the country, which is China, will produce up to the point where the marginal cost will be equal to the price. The outcome of collusion When the state of China involves in collusion in the petroleum business, it will face the good markets as a monopoly (Wu & Kang, 75). The aspect of being a monopoly will make the collusion to control prices of energy and petroleum products thus making greater returns and an absolute maximization of profits. The stability of the cartel The stability of the cartel will be based on excellent business deals among the countries involved in transactions with the Organization of Petroleum Exporting Countries. The stability of a cartel will lead to the rise in the economic growth and development for China. The limits to collusion A country would not want to breach an agreement with its trade partners. This can facilitate a return to the non-cooperative equilibrium where each of the country in participation earns least profits. Even though, a country like China is always taking risks by destroying some agreements if the benefits are quite lucrative. This may create a platform of economic growth and development at a faster rate than expected (Wu & Kang, 103). The power of oligopoly will always have limits. This means that there are rules and regulations that limit the transaction of these petroleum products. In cases whereby a country is not a member of the Organization of Petroleum Exporting Countries, it will hardly sign business agreements with the cartels. The energy security in China The energy security refers to the availability of adequate or rather sufficient provision of petroleum product at prices that are affordable to a majority. In China, the consumption of fuel is very high. As a result, there are government regulations that make sure that the affordability of the energy sources is ideal since energy is the driving force of an economy. The state of security of the energy sector has prevented the dominance of cartels who can constantly lead to fluctuations of petroleum products. This is due to the fact that the cartels are always considering their own benefits but not the benefit of the whole economy. Such collisions may hinder the uniform distribution of resources as centralization of activities will be dominant. Terrorism is also associated with the cartels in order to acquire greater shares of markets in the energy sector. The administration of China therefore ensures that the state is safe from such ill practices that will always make the country to delay in terms of economic growth and development. Areas of general confusion in relation to the security of energy The association of the security of energy with the consumption and imports views the reduction of oil importation as a fundamental policy. This point of view will automatically reduce the reliance of China on the foreign oil suppliers thus decreases the cases of constant price fluctuations in the markets. The basis of this idea is that oil is a fungible commodity with the oil prices deviating to the point of equilibrium internationally (Wu & Kang, 215). Even if the state of China is not involved in any transaction of oil supply, there will be shocking news on the fact that there is a rise in the domestic oil prices. Majority tend to think that the use petroleum products are generally associated with hazardous situations such as pollution. There is always an efficient method of controlling this by using the energy sources appropriately and there should be charges that equals to the damages caused by the use of fossil fuels. The government of China ensures that the country is safe by continuously providing teachings to the state on the importance of maintaining a pollution free environment. Taxes and Subsidies Taxes can be used to raise the price of energy and so discourage consumption, thereby contributing to lower energy intensity in the economy. Higher taxes in the short run affect consumer behavior directly by encouraging less use and in the long run contribute to a more energy effective and efficient capital stock. The difference in vehicle fuel efficiency between the state of China and the Middle East is due to a number of factors but the higher gasoline and diesel prices in Europe are certainly an important factor (Lim & Tai-Wei, 322). Subsidies to new energy sources such as solar and wind can contribute to a more diversified energy supply system. Removing subsidies to fossil fuel production in the state of China would increase the price of energy and so discourage energy usage. The main aim of this step is to control the usage fossil fuels due to their hazardous impact of the air pollution that eventually causes global warming. In the long run this procedure will be ideal because agricultural production will be optimum in China as the rate of global warming will be negligible. This shows that even if the consumption of gasoline is steadily increasing in China, there are precautions that should be followed in order to avoid the extreme negative effects of the usage. Conclusion and Summary China has steadily risen to the top levels in international energy demand over the past few decades in the study and research for the energy usage. China is closely following the United States in oil consumption internationally but in the year 2010, it was the top consumer of energy. At the time, China started the oil business it was at one point the net oil exporter until the time it was rising in the economic growth and developed where it started consuming large volumes of energy and it became the second largest net importer of crude oil and petroleum products, as they were required in large volumes. China’s rise in oil consumption is very high that it is almost overtaking the United States’ consumption as indicated by research led by the Energy Information Administration (Jiang & Zemin, 72). Current research by the Energy Information Administration shows that China has overtaken the United States in oil importation due to the various activities of economic growth and development in China. Even though the domestic fuel prices in China undergo regulation by the government through the responsible department, the prices are always revised quite often in accordance with the world oil prices and due to that, the diesel prices and the gasoline prices tend to follow or rather comply with the world oil prices. The natural gas usage in China has steadily risen in the current years and the importation is done through the pipeline and the liquefied natural gas. In the sector of Coal as a form of energy, China is the top producer, importer, and consumer. This nearly accounts for half of the international coal consumption in the world. The production of coal in China has made the country to create awareness of the control measures to prevent the effects of global warming. The rising production of coal in China has made the country to be the leading producer of energy in the whole world. According to the rising industrialization and the rapid rise in the modern economy, China has become the largest power generator globally. Internationally, China is very famous due to its rapid economic growth and development and this has triggered the country’s general demand for energy to increase thus effectively securing energy resources. Works cited Jiang, Zemin. Research on Energy Issues in China. Amsterdam: Elsevier/Academic Press, 2010. Print. Lim, Tai-Wei. Oil and Gas in China. Singapore: World Scientific, 2010. Print. Wu, Kang. Energy Economy in China. Singapore: World Scientific Publishing Company, 2012. Print. Read More