Price control cannot ensure energy supply
China Daily  Updated: 2006-01-20 06:29

Though policy-makers made clear their intent to allow energy prices to rise, the increase in liquefied natural gas (LNG) in South China since the end of last year is stretching their patience to the limit.

Last month a regulation strengthening price control was issued by the State Development and Reform Commission the country's pricing authority to curb LNG price hikes.

But government efforts have not stopped gas prices from soaring. In Guangzhou the cost of a 15-kilogram bottle of LNG has risen to 115 yuan (US$14) from 95 yuan (US$12) since the beginning of this year.

Worse, a shortage of bottled LNG has become a pressing problem for many cities in South China. Local retailers are reducing their supply to minimize losses as rising wholesale prices cancel out almost all of their profits.

Undoubtedly the ongoing short supply of LNG reminds us of the similar oil crisis that hit the same region last year.

At that time it was the unprecedented long queues of cars at empty pumps that shocked the pricing authorities into taking action. Large State-owned oil companies were banned from exporting and urged to increase the domestic supply.

The oil panic was resolved, but at a dear price. Simply compensating for the "loss" a domestic oil giant suffered by selling oil at home for less than international prices cost the government more than 10 billion yuan (US$1.2 billion).

This sort of government subsidy of a very rich State-owned company is surely open to question.

As a closely-related energy market is experiencing a similar situation, policy-makers should think twice before wading into price intervention once again.

The underlying reason the country wants to introduce an energy pricing system driven more by market forces is to encourage energy saving and the use of clean, alternative energy sources.

Higher energy prices will raise economic incentives for more efficient energy use. At the same time they will make the use of clean, alternative energy sources commercially viable.

The promotion of the use of LNG, a clean energy compared to coal, which accounts for two-thirds of China's energy supply, is an integral part of the country's new energy strategy.

Nevertheless, futile efforts at price control and the worsening shortage of LNG have been discouraging consumers from embracing this clean energy.

Policy-makers' attempts to resist the upward pressure soaring international energy prices exert on domestic energy prices is understandable. The effects of a substantial increase in energy prices will be felt in every corner of the national economy, but many sectors are far from prepared.

It is true the impact of energy price adjustments will be felt unevenly by various groups. It will also take time for all of these groups to absorb the energy price shock.

But that is not an excuse for delaying necessary pricing reforms. To facilitate such reforms, government support should first be promptly delivered to the underprivileged.

That six provinces in South China have recently adopted temporary fuel subsidies for low-income families is a positive step towards adapting local economies to rising energy prices.

If the country is to accept higher energy prices as a precondition of making the economy more energy efficient, the government should set aside more of its support for those that are more vulnerable to such price hikes.

(China Daily 01/20/2006 page4)

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