China’s oil and gas price policy may be good for drivers of cars and trucks in this huge communist country, but it is really bad for profits of the nation’s oil companies. China Petroleum & Chemical (SNP) had its margins destroyed by the central government caps on gas and diesel priced.

Too bad the same program is not available in the US. Gas would be $1.50 a gallon.

According to Bloomberg, China Petroleum, Asia’s biggest oil refiner, "posted an 87 percent drop in second- quarter profit after government caps on fuel prices prevented the company from passing on record crude oil costs to consumers."

Even the credits that China gives to its large refiners and exploration companies cannot offset the huge increase in the cost of oil to the petroleum companies compared to the unusually low prices they are forced to charge for gas. If crude stays above $100 and petrol prices are kept rock bottom, earnings at China Petroleum should actually get worse.

The Chinese energy pricing system does offer some insight into how the US could cap inflation, if it were so inclined. Gasoline and jet fuel may have dropped slightly from their peaks a month ago, but the prices are still too high to help the auto companies and airlines stage any recovery. The average citizen still faces increasing fuel and commodities prices which are eroding his buying power which, in turn, prevents consumer spending.

At this point, the federal government can hand out more tax rebates or pump billions of dollars into troubled banks.  The capital moved from the Fed to banks and brokerages is not being passed on to consumers.

Or Washington could do something novel and follow China’s lead in stimulating the economy and keeping fuel prices low at the same time.

Douglas A. McIntyre

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