The Chinese still maintain a system of price controls because they believe it serves to prevent rioting. That means that oil refineries in China are not allowed to raise the gasoline price when the price of crude oil goes up. Instead it squeezes profits and this time the price of crude has risen to the point where many refineries are losing money and therefore cut back on the production of gasoline to reduce their loses. Of cause their system is insanely ineffective and they should question whether the implied shortages is not more of a cause for rioting than increasing gasoline or diesel prices. In any case every time the regulated gasoline price is allowed to increase in China we should expect higher Chinese crude oil demand and therefore higher global prices for crude oil. Exactly as we have seen it this time.

Chinas economy is now so large that whatever they do it will affect world prices not only in oil but in everything really. This is not bad. The world can thank primarily China for keeping global inflation low because of their ability to produce almost any kind of goods at low costs.

Don’t worry middleroad gasoline prices will increase if the price of crude oil stay at $96. The refineries are getting a lot of their current supply at prices much below $96 because most (I think) crude oil is traded in long-term contracts. The $96 is a spot price and it does not represent the average market price. Previous high levels of gasoline prices have been fuelled not so much by the price of crude oil but more because of large variations in the refining capacity. Right now there are no problems with refining capacity so the gasoline price is low. But it will rise and it will rise even more if the refinery capacity is limited because of a hurricane or something else.

Rising gasoline and diesel prices are really the only important thing that can promote the development of alternatives to fossil transportation fuels so I welcome it. Let it go beyond $100. There will not be any recession because oil is simply not as important for the economy as it used to be when it was used for everything energy related: heating, electricity generation and transportation. Now it is only transportation and here it is getting competition from alternatives and the world is wealthier now than it was in 1980 so oil price increases are more affordable. I hope it goes to $120 today rather than tomorrow and that it stays on or above that level. It would make current cellulosic ethanol technology profitable and expedite its market introduction dramatically.