Dramatic energy market price swings have been de rigueur, of late, but today’s large drop had a compelling rationale: China is literally raising pump prices nearly 20% overnight.
To consumers there, I say, welcome to our world.
Just after the start of trading, today, it was announced that virtually all categories of transportation fuels would rise 1,000 to 1,500 Yuan per tonne. International measures of fuels are often represented in metric tonnes, as opposed to our more familiar gallons. This translates into about a fifty cent per gallon price rise to take effect tomorrow.
The timing of the move was also surprising, but also shrewd. I was among many analysts who supposed such a move would not occur prior to the Olympics, but the upcoming meeting in Saudi Arabia this weekend appears to have served to hasten the Chinese government’s move.
Most of the focus all week has been on handicapping how much additional crude oil Saudi Arabia would put on the market. Estimates are ranging from 200,000 to 600,000 additional barrels of crude oil, and the math is complicated by earlier production increases and whether or not they are to be included in Sunday’s announced number.
However, I have wondered what Saudi Arabia was going to require of consuming countries. This is, after all, a summit of leading producing and consuming nations. China’s move appears to be a tip of their hat to the effort. Also, while it’s a hollow gesture, at best, given the lead time in producing additional supplies of oil, President’s Bush’s call to open the Outer Continental Shelf may represent the best the United States can offer conferees.
In my view, in order for there to be follow-through selling into and after the meeting, Saudi Arabia will have to step up on three fronts: announce a large production increase, inform the world community that there still exists a fair amount of spare production capacity, and signal that it will aggressively discount the more sour or heavy sulfur-laden crude oil that is going begging in the world market. Believe it or not, greater discounting of these crude oil varieties is necessary for them to be refined profitably into diesel and other fuels in the current environment.
While I have some reservations that we will be witnessing the expenditure of the world’s final resources to combat high prices, at least in terms of crude oil output, further subsidy rollbacks in other countries could represent a seminal moment, where we see prices finally begin to decline steadily.
The Saudis and others leading nations are making a real, coordinated attempt to do something about high prices. From a consumer’s perspective, to quote the late great Tim Russert of NBC News: “go get ‘em.”