Natural Resources and Natural Monopolies

Backgrounder:
Beijing eases oil, coal grip – Wu Zhong in The Standard

There are growing indications that the Chinese government, alarmed by last year’s “oil crisis” – which actually may have been manufactured by state- owned oil companies – is finally getting ready to liberalize its energy policy and allow more competition. …

While coal miners are welcoming the price liberalization, China’s power plants are concerned that the new policy will boost thermal coal prices and, hence, their production costs. In a prompt reaction, the China Electricity Council urged the government to retain its controls on coal prices.

But as China’s economy continues to free-wheel, calls to retain government control on prices sound outdated. It would be more rational to urge Beijing to consider liberalizing electricity prices.

But if that got to the consumer, it would risk upsetting what China has valued most since the upheaval in Tiananmen Square in 1989: stability.

The interesting point not mentioned is that some of these industries are most efficiently served by natural monopolies, namely electricity distribution. But maybe even this sector is no longer best organized in a single firm. The monopoly power of the oil firms perhaps allowed them to create the shortage. But the deregulated California power market was vulnerable to the shenanigans of Enron. Market actors are interested in themselves first – and they should be, but Beijing wants it both ways: the growth from free market entrepreneurship and the stability from controlled markets.

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