Monday, July 7, 2008

Gas Prices and China’s Feast from Famine

by Larry Mongoss, guest blogger

Last year when I was in Chengdu, a bicycle brushed by me as I was walking along the sidewalk. I was surprised to see the rider was not pedaling. A second look brought my attention to the two wheeled things that I remember so fondly and I noticed that most had batteries and a little electric motor down where the business gets done. I was also surprised at how quiet the scooters were until I realized that they too were battery operated. I had fun counting old fashioned bicycles – still lots around but it seems like there were more of the new kind. So I went window shopping and saw that they were available everywhere and, while not downright cheap, priced quite reasonably. A nice convenience for those that can't afford cars.

So what does this have to do with the price of gas in China?

When the Chinese government recently announced that gas prices were going up, I, like many people, was surprised. Mostly, cynics that we are, we didn’t expect something that might anger people to happen before the Olympics. But I guess, when the alternative is long lines at the pumps, and taxis that won’t go, the early price increase seemed reasonable.

Taking a longer term perspective, which is what I am more interested in talking about anyway, gasoline and diesel prices are on the rise. This recent 20% increase is pretty muted relative to what we have seen in the US, but things will catch up. There is enough market influence in China now that having a state set price on anything that effects more than a few select cadres is no longer practical. Make the oil companies sell cheap and they simply stop refining. The days of rice coupons and rationing, though not forgotten, are looked back upon and not part of the future. Expensive oil, on the other hand, is.

High energy costs are not new to China. In fact for anyone over 30, both energy and the things that use it have been generally costly. I can remember taking a taxi in China some 20 years ago and being surprised at how quickly the driver would shift into third. I was thinking dirty valves and poor acceleration; he was thinking two more kilometers on my tank of gas. Though prices have gone up, the steadily increasing income of the rising middle class has made energy, cars and air conditioners seem affordable.

Most likely, though, that flirtation with cheap energy is coming to an end. In China cheap oil has just started its seduction of a generation. This is in contrast to the US where, since the Second World War, we have been shaping our lives to the idea that traveling farther-faster-cheaper is what we do. Our highways, suburbs and shopping malls all have the reliance on cheap oil built into them. While China’s growth over the last two decades has been frenetic, and much of it imbued with this same bigger-faster-further mindset, there are few in China who do not know what a shoulder pole is used for.

So – and this is a question I have been pondering for the last five years – what happens when gasoline finally reaches $10/gallon in the US and China? For me the obvious answer has always been bicycles and trains – and that brings the US right back to China as I first met it. I may be wrong about the exact technology. It is electric cars and not bicycles that people talk about in the US. While, as I pointed out in the opening, in many of China’s cities electric scooters and bicycles significantly outnumber the pedaled kind. But this latter observation kind of makes my point. China is, ironically, much closer to a reasonable end state for dealing with high energy costs than the United States.

The real question, then, is whether the leaders of China, both political and business, will recognize this and change course. It is actually a tricky thing to do, because the technology is not all there. China, like Japan in the 1960s, is quickly gaining on the richer countries copying the way things are done in those countries, but that path is becoming obsolete. The current increase in the price of oil makes it a dead end. Copying what works in the US to deal with this would mean a very long wait. Grappling with the issue head-on, however, is something that China is well positioned to do. The solutions, from a social perspective, resemble more closely China of two decades ago then America of today. The technology required to make it work is still unknown, but it is knowable, and China is a great place to try it out. Perhaps then, the US can start copying what happens there.


Lance said...

Good luck with the U.S. copying anything it can learn from China or anywhere else in the world(see: socialized medicine for all). I love my country more than anything, yet at times like these we still blindly follow around a group of arrogant clique of pinheads in government who continue to lead us by the short hairs stumbling down an alley of political/societal ineptitude, simply because "it's the way things have always been done".

Unlike China, there is more pressure to make a "deal with the devil" for one to get into political office of any type in the U.S. No matter how much any candidate(Obama, Clinton, Damien Thorn) might rail against high energy prices and the fact we have to do something about being at the mercy of the "fat cats" and oil companies, what-have-you, the simple and(thus far) unalterable process has almost always been(at least since the 70's) that SOME company SOMEwhere on the "opposite" side...tobacco lobbyists, pharmacy companies, oil manufacturers...will be able to provide VOTERS in order to get into the office of one's desire. It's easier for a politician to decry(semi-mutedly) their sworn foe of the American people, while simultaneously doing a reach-around technique on them in order to get their foot in the door.

Hence the fact that we're in the truly early stages of one of the worst gas crunches ever, while Emperor Bush earlier last month refused to admit there was nothing wrong with the economy and that gas prices had nothing to do with it.

Conspiracy theory, Scully? We'll see just how much "better" things get next year, no matter who takes that first step into the Oval Office.

Alfonso said...

Copying the US from CH? Not so sure in this matter.

Natural resources against population ratio in the US is far better than CH's.

The US can afford to be more energy profligate as CH, they can afford, even if current energy "eng pass" becomes more serious.

But CH has far less options. It is just impossible for CH to copy American model, and very risk to try.

How the will solve the problem in CH? It will be an interesting thing to see.

Larry said...


Thanks for the note. In the short term I suspect you are right, and rightly cynical. In the longer term it is true, as Abraham Lincoln said, that you can't fool all of the people all of the time. What Lincoln failed to add to this pithy quote (and it would not have been so pithy had he done so) is that it really makes a lot of difference when people take a serious interest in what you are doing.

As long at the US sustains economic growth and the illusion that things are getting better for most of us, a blind eye is turned to the behavior of public servants that is not, in fact, public service. I think the illusion of progress may be coming to an end; certainly lots of people recognize that it does not apply to them and likely the number of such folk will grow. Out of that hard reality may come an unexpected improvement in the quality of governance.


Thank you for your comment. It is definitely true that the US has more abundant resources per-capita. Still, business as usual in America does not seem to be in the cards, so things will have to change. Oil, simply put, is a finite resource that is going away, so there is no way to keep doing what we are doing.

China, India and other resource and infrastructure limited countries have to, because of the factors you point out, start moving in a new direction and start moving soon. There is no good model for how to do that in the world today. There have been great sustainable cultures through human history, but none scale to the kind of population that exists on earth today. On the one hand, I am extremely pessimistic about the fate of humanity in all of this, but on the other I am continually surprised by human ingenuity. I think it is important to look as broadly as possible to find that ingenuity. Simply put, I don’t know where the world leaders of tomorrow will be coming from.

chamberoftenthousandflowers said...

The USA and other western countries have been surfing the oil wave for many decades whereas China has not. In theory it should be easier for CH to effect some sort of turnaround of habit compared to westerners who have been in this situation for too long for our own good.

Larry said...

Well said. And now we get to see how theory and practice hold up to one another.

Mary Witzl said...

I find myself wondering if the U.S. can learn from China. Personally, I don't think we're ready for this yet. We don't have the background of suffering and extreme hardship (or the current generation does not); we would have to lose to gain. Sadly, that may yet happen as oil becomes more and more expensive. And whatever replaces it, I fear that the greedy will always manage to extract the lion's share of the profits.

I found your blog from Chris Eldin's Book Roast, by the way. I recognized your name: I read your story in the Spring 2006 edition of MotherVerse. (Mine was just under yours!)

Xujun Eberlein said...

Hi Mary, nice to see you here! Are you still living in UK? (I just went back to check your story in MotherVerse. :-))

Are you going to be on Book Roast next Wednesday (my day)?

Mary Witzl said...

Yes, I'm still in the U.K., but after nine extra years in Japan (since I wrote the MotherVerse piece, anyway.)

I'll try to be at Book Roast on Wednesday!