The True Problem Behind “Oil Prices Are More Expensive Than in the United States Due to High Taxes”
Published in Sichuan News Network
(China) on 12 July 2012
by Chen Yizhou (link to original)
On July 10, the National Development and Reform Commission (NDRC) announced that starting on July 11, the price per ton of gasoline and diesel will be reduced by 420 yuan and 400 yuan respectively. A representative of NDRC said that compared to most countries, including Japan, South Korea and those in Europe, the price of refined oil in China is still low right now. However, oil prices in China are higher than those in the United States; it is in the tax aspect that [oil prices in China are] higher, and this part of the revenue is turned over to the national treasury.
As early as 2009, Sinopec [the China Petrochemical Corporation] has claimed that Chinese crude oil prices are lower than those in the United States. In 2011, the NDRC also said that the non-tax part of oil prices is lower not only than that in Europe but also the United States. The logic above is, in fact, exactly the same as “oil prices are more expensive than in the United States due to high taxes.” This is not mere fiction because data exist as evidence. The United States’ tax accounts for approximately 12 percent of the entire price of refined oil, while China’s current tax accounts for 28 to 30 percent. Data show that the tax burden on the price per liter of oil in the United States averages only 0.74 yuan, while the current tax per liter of oil in China is as high as over 3 yuan. This is the status quo.
The current situation also highlights this proposition: Since sales prices constantly align with standard international prices, various taxes and fees in the distribution and supply chains should also progressively converge downward. Chinese people’s spending power is far below that of Americans. The burden on people’s livelihood will get heavier and heavier under such a high tax burden on oil prices and inflationary pressure.
Of course, oil prices, whether high or low, should not be compared to those in the United States. Using the U.S. as a reference will only [result in a] loss of basic reason. First of all, the domestic petrochemical industry is a monopoly. Prices in a monopoly are not automatically set by market supply and demand adjustments, so it cannot reflect the real market situation. On the other hand, the United States is the most economically developed country in the world. How can we, as a developing country with much lower per capita income and spending power, compete with it? The same price that is reasonable in the U.S. may be unreasonable in China. Because commodity prices are always proportional to the public’s bearing capacity, once out of proportion, prices could only be unreasonable. To withstand oil prices higher than those in the U.S. with China’s level of income only makes people speechless. But inversely, oil prices lower than those in the U.S. do not automatically mean that they are reasonable. This is a problem that must be clarified.
The growth in demand for, and increase in reliance on, foreign crude oil has laid a long-term foundation for refined oil prices to rise. In my opinion, there is no “original sin” in the increasing price of refined oil. The keys to the problem are: First, domestic commodity prices continually converge with global standards under global economic integration, but international prices are still attached to “un-international” high tax rates, not only in the area of refined oil. Second, the growth rate of the national income and the rate that social security improves lag behind economic growth. With inflationary pressures, commodity prices are rising across the board. A “developing [country]” income, “developed” level of consumption and ups and downs in oil prices will surely lead to social sensitivities. This is the true problem behind [the statement that] “oil prices are more expensive than those in the United States due to high taxes.” From this point of view, a reduction in the tax and an increase in people’s income are related not only to reasonable oil prices but also to social justice.
As early as 2009, Sinopec [the China Petrochemical Corporation] has claimed that Chinese crude oil prices are lower than those in the United States. In 2011, the NDRC also said that the non-tax part of oil prices is lower not only than that in Europe but also the United States. The logic above is, in fact, exactly the same as “oil prices are more expensive than in the United States due to high taxes.” This is not mere fiction because data exist as evidence. The United States’ tax accounts for approximately 12 percent of the entire price of refined oil, while China’s current tax accounts for 28 to 30 percent. Data show that the tax burden on the price per liter of oil in the United States averages only 0.74 yuan, while the current tax per liter of oil in China is as high as over 3 yuan. This is the status quo.
The current situation also highlights this proposition: Since sales prices constantly align with standard international prices, various taxes and fees in the distribution and supply chains should also progressively converge downward. Chinese people’s spending power is far below that of Americans. The burden on people’s livelihood will get heavier and heavier under such a high tax burden on oil prices and inflationary pressure.
Of course, oil prices, whether high or low, should not be compared to those in the United States. Using the U.S. as a reference will only [result in a] loss of basic reason. First of all, the domestic petrochemical industry is a monopoly. Prices in a monopoly are not automatically set by market supply and demand adjustments, so it cannot reflect the real market situation. On the other hand, the United States is the most economically developed country in the world. How can we, as a developing country with much lower per capita income and spending power, compete with it? The same price that is reasonable in the U.S. may be unreasonable in China. Because commodity prices are always proportional to the public’s bearing capacity, once out of proportion, prices could only be unreasonable. To withstand oil prices higher than those in the U.S. with China’s level of income only makes people speechless. But inversely, oil prices lower than those in the U.S. do not automatically mean that they are reasonable. This is a problem that must be clarified.
The growth in demand for, and increase in reliance on, foreign crude oil has laid a long-term foundation for refined oil prices to rise. In my opinion, there is no “original sin” in the increasing price of refined oil. The keys to the problem are: First, domestic commodity prices continually converge with global standards under global economic integration, but international prices are still attached to “un-international” high tax rates, not only in the area of refined oil. Second, the growth rate of the national income and the rate that social security improves lag behind economic growth. With inflationary pressures, commodity prices are rising across the board. A “developing [country]” income, “developed” level of consumption and ups and downs in oil prices will surely lead to social sensitivities. This is the true problem behind [the statement that] “oil prices are more expensive than those in the United States due to high taxes.” From this point of view, a reduction in the tax and an increase in people’s income are related not only to reasonable oil prices but also to social justice.