Comparing the Gasoline Price between China and the United States

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Content page
List of table 2
1. Introduction 4
1.1 Product nature 4
1.2 Gasoline prices overview 5
1.2.1 Gasoline industry in China 5
1.2.2 Gasoline industry in the United States 5
2. Exploring the differences of the gasoline pricing between China and the United States 6
2.1 Demand and supply 6
2.1.1 Theory review 6
2.1.2 Analysis 9
2.2 Market structure 11
2.2.1 Theory review 11
2.2.2 Analysis 12
2.3 Government role 15
3. Conclusion 16
Reference list 18
Appendix 1 Gasoline price dated 27 Feb 2013 by areas 19

List of table
Table 1 Typical compositions of gasoline 4
Table 2 Major market structures and features 11

List of chart
Chart 1 US Retail Gasoline Price Historical Data from Jan 2011 to Jan 2013 6
Chart 2 Supply side 7
Chart 3 Demand side 8
Chart 4 Equilibrium 9
Chart 5 The oligopoly kinked demand 12
Chart 6 Equilibrium in competition market 14
Chart 7 New equilibrium under impact of OPEC 15

List of figure
Figure 1 Retail gasoline price dated 26 Feb 2013 5
Figure 2 The OPEC share of the world’s crude oil reserve in 2009 13
Figure 3 The OPEC flow of crude and refined oil 14

Comparing the Gasoline Price between China and the United States

1. Introduction

1.1 Product nature

Gasoline is a transparent, petroleum-derived liquid that is used primarily as a fuel in internal combustion engines. Gasoline is produced by distillation, the separating of the volatile, more valuable fractions of crude petroleum. Therefore gasoline is not the product that is invented but rather discovered by human being (elmhurst.edu 2012). The typical compositions of gasoline are as follows:

Typical Composition of Gasoline
General Name Examples Percentage
Aliphatic – straight chain Heptanes 30-50
Aliphatic – branched Isooctane
Aliphatic – cyclic Cyclopentane 20-30
Aromatic Ethyl benzene 20-30
Table 1 Typical compositions of gasoline
Source: elmhurst.edu 2012

Thus with the standardized product nature of gasoline, it is more convenient to compare the pricing of the gasoline between two different countries as product features and compositions would basically be the same for gasoline sold in China or in the United States which makes the comparison of more significance.

1.2 Gasoline prices overview

1.2.1 Gasoline industry in China

Figure 1 Retail gasoline price dated 26 Feb 2013

China has raised fuel prices by more than 3 percent starting from 25th Feb 2013 which is the first time of price adjustment in China this year. With gasoline went up by 300 yuan per ton while diesel added 290 yuan per ton (china.org.cn 2013), the retail gasoline price reaches 8.1 Yuan per liter (#93) or US $1.296 per liter . Another major feature of the gasoline pricing in China is that the prices across different areas and provinces tend to share a flat price as shown in the appendix 1.

1.2.2 Gasoline industry in the United States

In term of the price of gasoline in the US, according to the most recent two year historical data as shown in the below chart, the pricing fluctuated around the level of 3.5 per Gallon. In January the level of retail gasoline price in the US was 3.677 with a year on year growth rate of 3.81% (U.S. Energy Information Administration 2013). Thus in term of the liter, the most recent retail gasoline price will be 0.971 per liter.

Chart 1 US Retail Gasoline Price Historical Data from Jan 2011 to Jan 2013
Source: U.S. Energy Information Administration 2013

In contrast with the flat prices of gasoline in China, the US has differentiated prices across different states.

2. Exploring the differences of the gasoline pricing between China and the United States

2.1 Demand and supply

2.1.1 Theory review

Modern often refer the buying side and the selling side as the two major factors that go together to determine the pricing of a product in the market where people come together to trade. The buying side is known as the demand side while the selling side is referred as the supply side (Arnold 2011, p. 55). Simply speaking, buyer behaviors determine demand side while the seller behaviors determine the supply side.

Chart 2 Supply side

As the above supply curve shows, the relationship between the price of the product and the qty supplied by the suppliers is a positive one which means that suppliers are willing to increase the supply of the particular product if the price goes up. In contrast, the price will be reduced if the buying demand from the buyer side weakens due to some reasons as the below chart (demand curve) shows.

Chart 3 Demand side

Under the interaction of the supply curve and the demand curve, the intersection remarks the equal of the supply and demand which is referred as the equilibrium. It is believed that at the point of equilibrium, the allocation of goods as at the most efficient as the qty required under this price level is exactly the qty supplied by the supply side as the following chart indicates.

Chart 4 Equilibrium

Also movement along a curve and curve shift could happen under certain market conditions which would be elaborated later.

2.1.2 Analysis

2.1.2.1 Gasoline sold in China

As in the case of gasoline sold in China, the pricing of the gasoline is determined by a government control pricing mechanism as follows:

a. The government functional department, National Development and Reform Commission (NDRC) provides the suggested price of gasoline to the market;
b. Gasoline sellers need to follow the suggested price though they still can issue a 4% price adjustment based on the suggested pricing;
c. The National Development and Reform Commission (NDRC) will monitor the changes of the oil prices in Singapore, New York and Rotterdam every 22 working days. If the weighted aggregate change of the international oil price exceeds 4%, then the National Development and Reform Commission (NDRC) will evaluate the necessity of the adjustment of the suggested price of gasoline.

As seen from the pricing mechanism of the gasoline in the domestic market of China, obviously both demand and supply side forces are not directly reflected in the pricing determination of the gasoline as the National Development and Reform Commission (NDRC) plays a critical role in deciding whether the suggested price should be adjusted and also due to the 22 working days period of price monitoring over the oversea oil price, the domestic demand information as well as the qty that the suppliers are willing to supply are both not playing a strong role in the price determination of the gasoline product in China. In another word, the market theory does not well explain the pricing determination of the gasoline products in China though the demand from China of gasoline does play an important role in the price determination of international crude oil prices which in return affect the cost of the gasoline and its final market price.

2.1.2.2 Gasoline sold in the US

In case of the gasoline sold in the US, its price determination is more closed to the supply and demand model though with some differences as well. In term of the demand side, it is true that the number of cars used by people will contribute majorly to the domestic demand of the gasoline, but the fact that the strong demand from the development economies such as China and India. Therefore, here the market demand comes not only from the local demand in the US but also the external demand of the crude oil which affect the direct cost of the crude oil from which gasoline is caused. In term of the supply side, the gas stations could have set the gasoline price based on their own consideration of factors like competition and user groups. Thus, the supply and demand theory is better applied in the US case compared to the situation of China.

2.2 Market structure

2.2.1 Theory review

Table 2 Major market structures and features

The term market structure refers to the type of market in which firms operate (Lipsey & Chrystal 2007) which the concept of structure refers to a description of the industry in terms of the number and size distribution of firms and any entry barriers. Usual market structure forms include monopolistic competition, oligopoly, monophony, oligopoly, monopoly and perfect competition with the respective features provided in the above table.

Here we will focus on the concept of oligopoly which is the market structure of the gasoline industry in both China and the Unites States. The oligopoly is the situation in which a particular market is controlled by a small group of firms (investopedia.com 2009). And among the few dominant firms, an oligopolist is not a big enough part of the market like a monopolist to be able to play as the price maker (Stroux 2004). As the below Oligopoly kinked demand shows, one important lesson to be learnt about the oligopoly market is that the increasing of price by a supplier will result in the loss of revenue. Therefore under market structure of oligopoly, prices of different suppliers will tend to keep unchanged though the pricing mechanism is still subject to the interaction of the demand and supply side forces.

Chart 5 The oligopoly kinked demand

2.2.2 Analysis

The Chinese market of gasoline is also an oligopoly market structure as the market is dominated by two major sellers: CPCC (China Petroleum Chemical Corporation) and Sinopec (China Petroleum and Chemical Corporation).

But as in the case of China, as said above the pricing mechanism of Chinese gasoline is basically determined by the decision of the government relevant offices and thus the number of the suppliers does not largely affect the pricing of the products though the suppliers have the 4% allowance to adjust the pricing of the gasoline.

As in case of the United States, its market conditions fit more into the description of oligopoly with market competition as well as few market sellers. Here as said above, the market price of gasoline in all countries including US and China are greatly influenced by the imported price of the crude oil which is greatly affected by one important organization in the global organization known as the OPEC or Organization of the Petroleum Exporting Countries. The OPEC is considered as the world’s most obvious and successful Cartel which is defined as a company / organization with a unique position with the opportunity to adopt a simple model to optimize the price (Mankiw 2011).

The OPEC has major impacts over the pricing of gasoline prices in both US and China:

Figure 2 The OPEC share of the world’s crude oil reserve in 2009
Source: OPEC Annual Statistical Bulletin 2009

Figure 3 The OPEC flow of crude and refined oil
Source: OPEC Annual Statistical Bulletin 2009

OPEC consists 12 oil production countries such as Saudi Arabia, Iraq, Kuwait and so on. These 12 countries account for 79.6% of the world’s crude oil reserves according to the 2009 data shown in the figure above. Its production volume control has shown great influence historically over the crude oil price in the international market. For instance, in year of 2004, OPEC ordered to reduce the members’ overall qty of barrels to be produced by 1.9 million resulting in the price raise from USD 25.48 to USD 32.61 (china.com.cn 2004).

Secondly, OPEC is a profit-maximizing cartel. Through the organizational meeting among the OPEC members, the organization goal is obvious which is to achieve long term as well as short term profit maximization and benefit the member countries economically.

The impact of the OPEC could also be explained by the supply and demand curve. Suppose that the supply and demand in a free market with sufficient competition would be as follows:

Chart 6 Equilibrium in competition market

Then when the OPEC as a cartel control the production volume which will directly result in the reduction of the total output of crude oil in the world, then the supply curve will be shifted left hand side as the below chart shows:

Chart 7 New equilibrium under impact of OPEC

Therefore the equilibrium price will be higher than the original market equilibrium while at the same time the overall output can be control to a lower level which in the long term must benefit the member countries of the OPEC.

2.3 Government role

The government role also is considered as critical in the pricing of the gasoline product in both US and China. The most importantly both counties impose tariff over the product. In case of China, with various tariffs such as value added service tax, construction tax, consumption tax and so on imposed on the production and sale of the gasoline product. All these tariffs together account for approximately 30% of the final price value of the gasoline products and this is extremely high in the international practices. Comparing to China, the US has a relatively low tax rate over the gasoline products. According to the data, the average tax rate ranges from 12% to 15% of the final price value of the gasoline product.

Also in case of China, as mentioned above, the government plays an even greater role in the forming of the price with the special situation in China. The government sets the suggested price which the sellers in the market have to follow with limited space for adjustment. This shows that China plays a greater role in deciding the final price of the gasoline products.

3. Conclusion

With the analysis above, three major conclusions can be made in respect of the pricing of the gasoline product in both China and US, two super large economies in the world which in return will impact the international oil market with great and even in-dept influence because of their large demand of the gasoline product:

First of all, the government should stand aside a free market as with the greater control of the government in term of higher tariffs such as the case in the People’s Republic of China, the consumers will not be benefits as the final prices tend to be higher than the market price which should be co-decided by the supply side and also the demand side.

Secondly, the countries should find more energy forms instead of the gasoline form because of the strong control of the overall output by the OPEC organization.

Thirdly, demand of the gasoline should be reduced with the improved technologies as the supply of gasoline and crude oil in the earth is limited anyway.  
Reference list

Arnold, R. A. (2011), Microeconomics with access code. Mason: South Western Cengage Learning. p. 55

china.org.cn (2013). China raises fuel prices. Retrieved from http://www.china.org.cn/business/2013-02/25/content_28046923.htm

china.com.cn (2004) Impacts of OPEC to oil price. Retrieved from http://www.china.com.cn/chinese/HIAW/527910.htm

elmhurst.edu (2012). What is Gasoline? Retrieved from http://www.elmhurst.edu

investopedia.com (2009). Definition of ‘Oligopoly’. Retrieved from http://www.investopedia.com/terms/o/oligopoly.asp#axzz2M6il4bXs

Lipsey, R. G. & Chrystal, K. (2007). Economics. London: Oxford University Press.

Mankiw, N. G. (2011). Principles of Economics. Mason: South Western Cengage Learning.

Stroux, S. (2004). US and EC Oligopoly Control. The Netherlands: Kluwer Law International.

U.S. Energy Information Administration (2013). Energy Chart Retrieved from http://www.eia.gov/  
Appendix 1 Gasoline price dated 27 Feb 2013 by areas
Area 90# 93# 97# 0#
Beijing – 92#:8.05 95#:8.57 8.02
Shanghai – 7.99 8.50 7.91
Tianjin 7.15 7.71 8.14 7.56
Chongqing 7.36 7.79 8.23 7.63
Fujian 7.15 7.56 8.00 7.47
Gansu 7.09 7.54 8.05 7.45
Guangdong 7.35 7.93 8.60 7.74
Guangxi 7.13 7.48 7.89 7.50
Guizhou 7.11 7.63 7.89 7.59
Hainan 8.02 8.71 9.26 7.67
Hebei 7.14 7.69 8.04 7.57
Hainan 7.29 7.62 7.96 7.58
Hubei 7.21 7.65 8.01 7.59
Hunan 7.20 7.66 8.06 7.60
Jilin 7.32 7.54 8.27 7.71
Jiangsu 7.21 7.65 8.08 7.52
Jiangxi 7.11 7.61 8.16 7.52
Liaoning 7.16 7.60 8.08 7.60
Inner Mongolia 7.12 7.47 8.01 7.53
An’Hui 7.19 7.57 8.03 7.59
Ningxia 7.17 7.58 7.95 7.50
Qinhai 7.14 7.60 7.90 7.57
Shangdong 7.15 7.61 8.11 7.57
Shanxi 7.16 7.58 8.07 7.47
Shan’xi 7.17 7.65 8.20 7.64
Sichuan 7.26 7.75 8.24 7.64
Tibet 8.14 8.74 8.24 8.02
Heilongjiang 7.35 7.74 8.01 7.36
Xinjiang 7.06 7.57 7.97 7.51
Yunnan 7.25 7.79 8.32 7.61
Zhejiang 7.13 7.67 8.15 7.63
Shenzhen – 7.78 8.23 7.76