Wall Street was thrilled today by the news that China is raising the domestic price of gasoline and diesel for its consumers. This, we hope will reduce demand for petroleum products in China and lead to a decline in the price of oil.
This is dreaming. If there's one thing that experience should have taught us by now, it's that gasoline is largely price inelastic, particularly in the short term. In this country, prices are up around 35% over the past year and demand has dropped about 3%. The Chinese are upping price by 18%. Should we expect more than a 2% drop in demand? They represent only about 10% of world consumption, although the fastest growing component. A 2% drop in a 10% segment means an overall reduction of .2%. Hardly a ripple in the supply stream.
We're going to $5 gasoline. Thanks to China's move to increase prices, that day will probably be postponed by a week.
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