Business

Thursday October 1, 2009

Subsidies unhealthy for market-driven economy


SHORT-TERM government subsidies will support the development of alternative energy sources to achieve economies of scale but, if prolonged, they become unhealthy and distort prices.

“In the interim term, it’s not a bad thing for governments to subsidise the development of cleaner energy to make it more competitive than coal and oil but, in the long term, it’s not healthy for market-driven economies,” Jing Ulrich, managing director and chairman of China equities and commodities at JPMorgan, during the session on “Volatile mix: Energy and commodities in a flux.”

“Solar energy, for example, is expensive but when solar panels reach economies of scale, the production cost will come down and this makes the energy cost cheaper,” she added.

Tom MacNeill, president and chief executive officer of 49 North Resource Inc, said the best form of subsidy was through the reduction of taxes.

“The least government involvement the better. When governments become involved in the business, it leads to capital flight and slows down development, which is bad for everyone,” he said, adding that governments should be sensitive and cautious in enforcing trade barriers and subsidies when the economy was still in a fragile condition.

Ulrich noted that the Chinese Government had started to reduce energy subsidy by moving prices of refinery products in tandem with oil.

China is an affluent force in determining future prices due to its role as a large producer and consumer of energy and commodities.

It consumes eight million barrels of oil per day, of which 50% is imported. The country is expected to sell 12.5 million vehicles this year, which means more demand for oil.

Its petroleum reserve is about 15 days and the government plans to raise that to 100 days.

China produces three billion tonnes of coal a year, comprising 50% of global production. This year, it became a net coal importer due to closing of smaller, illegal coal mines as a measure to consolidate the sector.

The country accounts for one-third of copper consumption in the world and, year-to-date, it has become a net importer of aluminium although it also produces one-third of the world aluminium production. It is also a big consumer of steel.

“China has huge needs for resources, which is why the sovereign fund, for example, invested US$5bil out of its US$300bil in the resource sector like refinery, coal and oil,” Ulrich said, adding that Chinese companies too were moving offshore to acquire resources-related firms.

China Resources Power Holdings president and chief executive officer Wang Shuai Ting said the Chinese government was pro-active in pushing for consolidation within the fragmented coal sector.

Smaller mines, for example, are imposed with production restrictions to encourage bigger miners to take over.

University of California, Berkeley faculty senior scientist and professor of physics Richard A. Muller said nuclear energy was becoming attractive again as the public perception on the safety issue evolved.

“The waste storage problem is a public perception issue and not rational judgment. It’s mostly fear of the unknown but people are changing,” he said.

, adding that smaller nuclear plants were being developed to alleviate the issue of high threshold involved in the set-up.

  • E-mail this story
  • Print this story