China on brink of blackouts and power outages due to price controls on electricity

China faces its worst power shortage in at least four years as soaring coal prices and government-set electricity tariffs force dozens of small power plants to shut down rather than face mounting losses. Facing what may be the worst coal shortage ever, nearly half of China's provinces have started to ration electricity going into the peak summer season. Coal prices in China have doubled since the start of 2008, and power demand doubled in 5 years. China relies on coal for 80% of its power generation. This year's electricity shortfall could be more severe than in 2004. The emerging power shortages have important implications for both inflation and growth.

China's problems mirror those of other Asian countries, such as Indonesia and Malaysia, where the rising fuel prices have impacted governments that subsidise fuel. China has also been struggling with petrol and diesel shortages as record crude oil prices forced small domestic refineries out of business.

- If the situation seems familiar, that is because it is the exact same problem as the one that caused the diesel shortages. The government of China fixes the price of the outputs (diesel, electricity), while the price of the inputs (crude oil, coal) rises rapidly in the open market. Large government-run enterprises continue to run, absorbing increasingly larger losses, while smaller companies, refusing to operate at a loss, give up and close up shop. This phenomenon has been amply documented and titled "Revolt of the Teapots", where teapots refer to those small China refineries.

This also demonstrates another phenomenon, which is the principle that "all action occurs at the margins", especially in a tight supply situation. In this type of situation, it does not require a major supply disruption to move the market, but relatively small disruptions will cause prices to rapidly escalate and bring chaos to a formerly orderly market.

Subsidies do not work in the long run, and neither do price controls. The Chinese government is trying to do something about it but how that will turn out remains to be seen.

Singapore petrol prices down another 4 cents on lower crude oil prices

This article belongs to the Singapore inflation watch story arc.

Pump prices at service stations across Singapore have been adjusted downwards for both petrol and diesel. The prices for all grades of petrol are down another 4 cents per litre, with RON98 at S$2.28 per litre, RON95 at $2.206, and RON92 at S$2.173. The move by Shell, SPC, ExxonMobil and Caltex comes a week after the fuel companies made a similar 4-cent price cut, the first after 14 consecutive price rises earlier. This time the cuts included a 2-cent reduction for diesel. This brings the price down to S$2.013 a litre, which is still over $2.00 per litre, and much higher than in the past. The price of crude oil dropped to $130 after staging its biggest fall in 17 years.

- Somehow I held off pumping petrol until late yesterday evening and to my surprise found that the petrol price had gone down another 4 cents. If only I had this sense of timing for my most recent crude oil purchase where I am down $10 per barrel already. That's okay, since Peak Oil has not been cancelled. All motorists (including myself heh heh), do enjoy your fill-ups at these prices while stocks last, because we will eventually be back on track again to $200 oil.

Updated :

1. Singapore petrol prices drop 4 cents for third time in 2 weeks

(2008-07-18 13:52:31 SGT) [Energy] Permalink

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