Why China Gas Subsidies Don't Matter

When China, which is responsible for about 9 to 10 percent of global consumption, is not curtailing demand however, "the western markets have to bear the price…as they reflect in higher global demand and higher prices of crude," Niket Patankar, CEO of research firm Adventity told IBTimes.

But the country hasn't stood still. Under the pressure of rising oil prices and criticism, China has been slowly easing its subsidies since June 20, with both petrol and diesel prices adding 1000 Yuan per ton, and Kerosene price gaining 1500 Yuan per ton. Markets became elated, or at least temporarily.

International crude prices dropped almost immediately. In Nymex trading, crude oil futures tumbled nearly $5 a barrel to close at $131.93. Analysts praised the curbing of subsidies in Asian countries and primarily in China, saying it would help slow demand for oil

But what happened next had analyst second guessing themselves.

In spite of the drop in subsidies, the price of oil not only rebounded on the second day, it kept rising for the next 3 weeks finally peaking on July 11.

"The criticism of the international community regarding the 'fairness' of Chinese oil price controls is at best hollow and self-serving," explained Dr. Antonin Rusek, economics professor at Susquehanna University.

Even if price liberalization would result in a 10 percent reduction in Chinese domestic demand – an unrealistically large number – Dr. Rusek predicts that world demand would only fall by about 0.9 percent (using 2007 numbers).

"It should be obvious that the impact of an increased Chinese demand for oil during the last five years (2003-2007) is rather small – its share increased by 1.9 percent over 5 years," he explained.

China's Real Impact

The spike in last month's oil prices amid softening Asian subsidies has cast a new perspective on the impact of China's internal policies and the global oil market. While China's current impact on the oil markets remains small, its appetite is predicted to drive up prices soon if new supplies aren't found.