China pegs oil price to $40 a barrel

[touchring]

....and pockets the difference. Not to mention the additional taxes imposed in recent months.

Tq Saudi Arabia for the free cash.


http://www.bloomberg.com/news/articles/2016-01-18/oil-prices-stopped-falling-at-40-a-barrel-for-chinese-consumers

For consumers in China, the benefit of oil’s crash stops at $40 a barrel.
That’s because the retail price of fuels such as gasoline won’t be cut in line with crude as long as it trades below that level, according to the country’s top economic planner. The policy is aimed at curbing consumption, cutting pollution and securing supply, the National Development and Reform Commission said when it unveiled the plan last week.
.........
The NDRC said the floor is also designed in part to shield oil drillers and producers from the global price collapse. The average cost of oil production globally is about $40, where China has built the price floor, the NDRC said. Costs are slightly higher in China because of the generally lower quality of the country’s oil resources, NDRC said.
The country produced about 4.3 million barrels a day in the first 11 months of last year, up 2 percent from the same period the year before. Output in November fell 0.5 percent, the first decline since April 2014.
“Although a lower crude price largely benefits the Chinese economy, it would damage domestic oil producers’ ability to maintain relatively stable domestic production,” Moody’s Investors Service said in a Jan. 18 report.

[GRG55]

Re: China pegs oil price to $40 a barrel and pockets the rest.

....and pockets the difference. Not to mention the additional taxes imposed in recent months.

Tq Saudi Arabia for the free cash.


http://www.bloomberg.com/news/articles/2016-01-18/oil-prices-stopped-falling-at-40-a-barrel-for-chinese-consumers

I don't see that there is actually any real "extra cash" here. The producers being "protected" are all owned by the same government that imposed the price fix. Basically it is just another tangible sign that Chinese petroleum SOEs are generally so inefficient they can't survive or compete with Saudi Arabia sourced crude oil.

Maybe Brazil should do the same thing to help out Petrobras, or Venezuela could help out PDVSA

[touchring]

Re: China pegs oil price to $40 a barrel and pockets the rest.

I don't see that there is actually any real "extra cash" here. The producers being "protected" are all owned by the same government that imposed the price fix. Basically it is just another tangible sign that Chinese petroleum SOEs are generally so inefficient they can't survive or compete with Saudi Arabia sourced crude oil.

Maybe Brazil should do the same thing to help out Petrobras, or Venezuela could help out PDVSA

In this case, why wouldn't Brazil do that?

[Southernguy]

Re: China pegs oil price to $40 a barrel and pockets the rest.

In this case, why wouldn't Brazil do that?

It does already: cost of gasoline is around $0,8 per litre. Near 3 dollars per gallon.

[GRG55]

Re: China pegs oil price to $40 a barrel and pockets the rest.

In this case, why wouldn't Brazil do that?

Because even though one sector of the economy is "protected", other sectors are put at a competitive disadvantage. That is what is going to happen in China.

It's like a "minimum wage" for the domestic oil producing sector. If $40 is so beneficial, why doesn't the Chinese government make it $50, which, presumably, would be even better. Or $70, or $100, or $500 per barrel. What's the optimum number for the Chinese economy? How do they know it's $40?

That's the problem with these sorts of government sector protection distortions. If it was a true policy based tax, such as a carbon tax, then the policy effect could be measured to see if the objective(s) were being met. Instead this is a move to prop up a bunch of non-viable State companies that have made a huge number of stupid and wasteful decisions at a time they were being showered with unlimited cheap credit and told to "go forth and multiply". Those days of capital misallocation are over, and the Chinese government is left with a mess to clean up.

In the USA the energy sector companies that are in trouble will be liquidated (just as Enron was allowed to go bankrupt). In China, because the government owns them, they can't be allowed to go under. Some pundits will continue to proclaim that the "Chinese way" is superior to what happens in America. I disagree. The so called "second largest economy in the world" is going to fall further behind the USA in this cycle.

[touchring]

Re: China pegs oil price to $40 a barrel and pockets the rest.

Because even though one sector of the economy is "protected", other sectors are put at a competitive disadvantage. That is what is going to happen in China.

It's like a "minimum wage" for the domestic oil producing sector. If $40 is so beneficial, why doesn't the Chinese government make it $50, which, presumably, would be even better. Or $70, or $100, or $500 per barrel. What's the optimum number for the Chinese economy? How do they know it's $40?

That's the problem with these sorts of government sector protection distortions. If it was a true policy based tax, such as a carbon tax, then the policy effect could be measured to see if the objective(s) were being met. Instead this is a move to prop up a bunch of non-viable State companies that have made a huge number of stupid and wasteful decisions at a time they were being showered with unlimited cheap credit and told to "go forth and multiply". Those days of capital misallocation are over, and the Chinese government is left with a mess to clean up.

In the USA the energy sector companies that are in trouble will be liquidated (just as Enron was allowed to go bankrupt). In China, because the government owns them, they can't be allowed to go under. Some pundits will continue to proclaim that the "Chinese way" is superior to what happens in America. I disagree. The so called "second largest economy in the world" is going to fall further behind the USA in this cycle.

I'm still skeptical about what I call autocratic capitalism or the "Chinese way" as you call it but I'm not going to jump to a conclusion so quickly without watching what happens over the next 5 years.

Many of us that only read the MSM won't know that the public sector in China (24% of economy) is smaller than most developed countries including the US (42%), France (56%), Greece (52%), Germany (45%).

https://en.wikipedia.org/wiki/Government_spending

There are many fast growing and leading private companies in China such as Alibaba (world's largest b2b and b2c ecommerce marketplace), Tencent (world's largest online gaming company), Lenovo (world's largest PC company), Wanda Group (world's largest cinema chain operator and world's largest commercial property owner) and Huawei (world's largest telecom equipment company).

Many of these companies are started in the mid to late 90s and are pretty unknown even 5 years ago. Companies like Alibaba, Tencent and Wanda pretty much jump out of nowhere with 20-30% annual growth rates even when they are already the largest player in the world for their trade.

http://www.bloombergview.com/article...china-s-growth

Private Companies Are Driving China's Growth

OCT 14, 2014 10:15 AM EDTBy Peter R. Orszag

In China, the conventional wisdom holds, state-owned enterprises dominate the economy, private companies are often starved for credit, and the central government exerts substantial influence.
But here's a quiz: What share of China's gross industrial output will come from state enterprises this year? I have tried this question on friends, even knowledgeable economists, and the responses I hear fall between 50 percent and 75 percent. The correct answer is only about 25 percent, a big drop from more than 75 percent in 1978.
In his important new book, "Markets over Mao: The Rise of Private Business in China," Nicholas Lardy of the Peterson Institute for International Economics assembles statistics like this to demonstrate that our image of state capitalism in China is dated and wrong. Lardy's central thesis is that "private firms have become the main source of economic growth, the sole source of increasing employment, and the major contributor to China's growing and now large role as a global trader." (Disclosure: I am on the board at the Peterson Institute.)

Lardy is a careful, soft-spoken scholar of China, not given to overstating his arguments in the hope that strength of conviction can make up for lack of evidence. But he pulls no punches in attacking prevailing assumptions about the Chinese economy.
Lardy uses the same classifications that China's national statistical agency uses to differentiate "state" and "private" companies. Normally, given the reputation of Chinese statistics, some skepticism about their accuracy would be warranted. But Lardy checked a sample of companies and verified the classifications. He also makes other good arguments against the possibility that the data are substantially biased.
Now, it's true that in some sectors state enterprises are still the major players in China. In tobacco manufacture, electric-power generation and oil extraction, for example, state companies' share of output exceeds 90 percent. But in many other industries, from general-purpose machinery to paper and plastics, the state share is less than 15 percent. As for services, state companies still dominate telecommunications, financial services and transportation, but more than four-fifths of retailers, accounting for about half of retail sales, are privately controlled.
But don't state firms enjoy substantial market power, even if they don't account for most of the output? Once again, Lardy suggests otherwise. For example, profit margins are no higher for state companies than for non-state ones, and the average return on assets of private companies is substantially higher than that of state ones -- roughly 13 percent and 5 percent respectively in 2012. Those facts are hard to square with the assertion that state companies enjoy extraordinary privileges and market power. Private companies use their retained earnings -- along with industrial bank loans, of which they receive roughly half -- to finance their own growth.
Finally, Lardy questions the notion that China's central government is omnipotent. Here's another quiz: Which country has more government officials per capita, the U.S. or China? China has 31 civil servants and party officials for every 1,000 people; the U.S. has 75. (France has 95.) Nor is the Chinese government always as successful as we may perceive. Its repeated efforts to consolidate the steel industry have failed, and its attempts to do the same with the auto industry have been only partially realized. Environmental protection has been uneven at best; one Chinese official complained that he couldn't conduct inspections because minimal funding meant he didn't have regular access to a car to visit factory sites.
Lardy's myth-busting informs a crucial question for the global economy over the next decade: Will Chinese growth decelerate noticeably?

One reason to expect slowing of growth is the middle-income trap that often afflicts countries with roughly China's per capita income. Those who are unconcerned about this dynamic in China invoke the state capitalism view: The government can sustain growth, even artificially, for a long time because it still controls most economic activity.
Lardy's thesis raises worrying questions about this assumption. He warns that the best hope for avoiding significant deceleration is to continue the process of structural reform, shifting further toward private enterprise. That is a harder path forward.
"Markets over Mao" should trigger a re-examination of how we view the Chinese economy. More urgently, it should rouse economic policy makers from complacency about the risks of a slowdown in Chinese growth.

[jk]

Re: China pegs oil price to $40 a barrel and pockets the rest.

grg55, i was under the impression that china still imported a lot of oil. thus the chinese gov't is limiting the benefit to oil consumers of lower global prices.

[touchring]

Re: China pegs oil price to $40 a barrel and pockets the rest.

grg55, i was under the impression that china still imported a lot of oil. thus the chinese gov't is limiting the benefit to oil consumers of lower global prices.

I presume that most of the oil imported by China goes to the production of gasoline. In major Chinese cities, the traffic gridlock is terrible. The Chinese authorities would want to discourage people from driving and use the subway, public transportation instead.

Some of the bigger cities like Shanghai have started to sell car license plate by auction.

http://www.shanghaidaily.com/busines.../shdaily.shtml

License plate bid success rate hits new low

By Anna Lu | June 27, 2015, Saturday | ONLINE EDITION
A record number of bidders totaling 172,205 and a drop in nominal success rate to a historical low of 4.3 percent were seen at the monthly Shanghai car plate auction held today, which for the first time officially adopted a new bidding system promising improved experience.
A total of 7,441 car plates were up for grab among individual car buyers under a price ceiling of 75,200 yuan for the first-round bids, both the same as last month.
The lowest winning bid went up 1,000 yuan to 80,000 yuan while the average price increased 921 yuan to 80,020 yuan.
A new bidding rule has been introduced to allow more room for price guessing in the second round.
The rule still stands that each one has only two chances of price proposals in the second round, and the maximum increase of bidding, 300 yuan, is based on the real-time average of others' bids.
But the effective timing of making a bid increase is now dependent on when the auction server receives the bid rather than when one submits it to the system.
This change means one can bid with fewer restrains, which is believed to calm down the public outcry about not being guaranteed a bidding chance in the last minute when data transmission congestion often spikes and leads to glitches.
"In the past, every one waited till the last minute to make their final bet, which is the only way to use the bidding rules to their advantage. Now one is allowed to strategize on his own to some degree," said Eddie Zhang, a car dealer in Shanghai.
Though technical setbacks have been smoothed out by the new system, that the highest bid doesn't necessarily win remains a frustrating part of what is called an auction.
Hu Jun, who failed for a ninth consecutive time to win a Shanghai car plate today, said he doesn't feel the new system and rule can make much of a difference.
“This is still a lottery-like auction," he concluded.
The whole auction system still runs under a conflicting idea of keeping the car plate price down at a “reasonablly high” level to curb speculation while making a car plate supply way short of demand to prevent city traffic deteriorating with surging car ownership.
And the government’s insistence on letting the market force play a big role in achieving all these just adds complication to the conflict.

[GRG55]

Re: China pegs oil price to $40 a barrel and pockets the rest.

I presume that most of the oil imported by China goes to the production of gasoline. In major Chinese cities, the traffic gridlock is terrible. The Chinese authorities would want to discourage people from driving and use the subway, public transportation instead.

Some of the bigger cities like Shanghai have started to sell car license plate by auction.

http://www.shanghaidaily.com/busines.../shdaily.shtml

Housing and automobiles are the two largest consumer purchase categories as the economy of a country matures. I find it difficult to understand how China expects a successful shift to a "consumer economy" if it restricts either of these two purchases.

[santafe2]

Re: China pegs oil price to $40 a barrel and pockets the rest.

Housing and automobiles are the two largest consumer purchase categories as the economy of a country matures. I find it difficult to understand how China expects a successful shift to a "consumer economy" if it restricts either of these two purchases.

Certainly not just a Chinese problem but misallocation of resources causes major problems. In the US we spend a few trillion in an ill advised war or two while our infrastructure falls apart. China has nearly unoccupied faux American cities while their solution to under building infrastructure in one of their major cities is to allow 4% of new vehicles to be licensed. How do you spell black market...oh, right, like that.

[GRG55]

Re: China pegs oil price to $40 a barrel and pockets the rest.

Certainly not just a Chinese problem but misallocation of resources causes major problems. In the US we spend a few trillion in an ill advised war or two while our infrastructure falls apart. China has nearly unoccupied faux American cities while their solution to under building infrastructure in one of their major cities is to allow 4% of new vehicles to be licensed. How do you spell black market...oh, right, like that.

Maybe Beijing needs to bring in "Obamacare with Chinese characteristics". Thereby raising the price of healthcare in China to such astronomical levels that consumer spending on it dwarfs housing, cars and anything else. Voila! Instant consumer society, without road congestion or property bubbles.

[GRG55]

Re: China pegs oil price to $40 a barrel and pockets the rest.

I don't see that there is actually any real "extra cash" here. The producers being "protected" are all owned by the same government that imposed the price fix. Basically it is just another tangible sign that Chinese petroleum SOEs are generally so inefficient they can't survive or compete with Saudi Arabia sourced crude oil.

Maybe Brazil should do the same thing to help out Petrobras, or Venezuela could help out PDVSA

Being a comparatively inefficient and high cost producer is by no means restricted to the Chinese State owned oil companies. That is why we are setting the stage today for the next run over $100/bbl.

Cnooc to Cut Oil Output First Time Since 1999 Amid Plunge

January 19, 2016

Cnooc Ltd., China’s biggest offshore oil and gas producer, plans to trim output for the first time in more than a decade as it cuts spending to cope with oil’s plunge below $30 a barrel.

The Beijing-based explorer will produce 470 million to 485 million barrels of oil equivalent this year, slipping from 495 million in 2015, it said in a statement to the Hong Kong stock exchange Tuesday. That would be the first decline since at least 1999. The company said it will spend a maximum 60 billion yuan ($9.1 billion), down from last year’s 67.2 billion yuan.

Total spending last year missed the company’s original target, highlighting how producers have struggled with oil’s plunge to a 12-year low...

...“Higher-cost oil producers, including Chinese explorers, are beginning to hold back output because they cannot beat the super-low crude prices,” Tian Miao, a Beijing-based analyst at North Square Blue Oak, a research company, said by phone. “It’s easy to understand why Chinese explorers such as Cnooc are reducing investment and production, because their costs are much higher than what the crude market is providing.”...

[Mega]

Re: China pegs oil price to $40 a barrel and pockets the rest.

Jim Rickards thinks $65 + ish by 2017

[Down Under]

Re: China pegs oil price to $40 a barrel and pockets the rest.

Being a comparatively inefficient and high cost producer is by no means restricted to the Chinese State owned oil companies. That is why we are setting the stage today for the next run over $100/bbl.

Hi GRG55,

Elsewhere, you state that you don't think oil is investable right now. However, here you state that at some stage, oil will be $100+/bbl. Does this mean that the timeframe is too indeterminate for the $100+/bbl. in order to invest in it today? Or is it, that you think it could go lower(significantly?) from here?

[GRG55]

Re: China pegs oil price to $40 a barrel and pockets the rest.

Hi GRG55,

Elsewhere, you state that you don't think oil is investable right now. However, here you state that at some stage, oil will be $100+/bbl. Does this mean that the timeframe is too indeterminate for the $100+/bbl. in order to invest in it today? Or is it, that you think it could go lower(significantly?) from here?

It can go anywhere from here. In the short run.

It cannot stay at these current levels in the longer run. The cost of replacing depleted reserves in the quantities needed to meet global demand is higher than the current price. We are now doing serious damage to the global petroleum industry's ability to function, especially the permanent loss of very skilled technical people.

Many of the companies holding the premier assets in their operating jurisdictions have been bid down to absurd levels. I noted one today on the "Flood of New Oil" thread. I still think oil is not investable - unless you can store physical in sufficient quantities perhaps. However, companies like Suncor with long life reserves in the ground in secure jurisdictions might today make the investable hurdle for anyone with a 3 to 5 year horizon.