Two Wrongs Do Not Make One Right

Recently there is an oil shortage in the sourthern part of China. Long lines develop and the government is concerned such incidents may eventually lead to social unrest. In today's Hong Kong Economic Journal (the journal is a local equivalent to Wall Street Journal focusing on economic news), there is a story saying that the Chinese government has announced a ban on the export of oil (refined oil not crude) in a bid to bring the shortage problem under control.

This is a typical case of how one regulation, after producing some unwanted and unintended consequences, leads to more regulation. The reason why there is shortage in the first place is simple: In China today, the government still controls the retail price of refined oil but not the price of crude as the price of the latter is determined by world demand and supply. So with the retail price set below the market level while the price of crude is shooting up like there is no tomorrow, it is not hard to see that firms will have no incentive to import crude and process it. That is one reason why shortage develops in China: Firms simply stop production to minimize losses.

Another reason is export. As processed oil can fetch a far higher price in the world market than the domestic one, it is only rational for firms in China to sell their processed oil abroad. So supply originally planned to sell domestically is now diverted overseas as a result of the price control.

The source of oil shortage in China thus originates from state regulation, and now the government wants to rectify the shortage problem not with eliminating the price control but through introducing yet another regulation: banning the export of processed oil! But can they? Smuggling activity is definitely going to rise generating lots of opporunities for corruption. Will more corruption help in maintaining social stability, you tell me.

In China, the oil producing firms are privatized in name only. The central government remains the absolute majority shareholder. After shortage surfaced, the central government prevailed upon these oil companies to assume greater social responsibilities, i.e. to ensure adequate supply so as to prevent social unrest, even if that means they will have to suffer temporary losses. In other words, private minority shareholders' interest be damned -- for the time being anyhow.