HONG KONG - Amid long lines and a national
fuel shortage at gas stations, the Chinese
government announced at the end of October that it
would raise gasoline and diesel prices by about
10%. It was the first green light Beijing has
given for a national fuel price hike in 17 months
despite sharp increases in international oil
prices during the same period.
As of
November 1, prices of petrol, diesel and aviation
kerosene are raised by 500 yuan per tonne, or
about 10%. A government
spokesman said the increase,
the first for diesel and gasoline since May 2006,
aimed to close the gap between soaring
international crude prices and China's
state-regulated refined product prices.
Beijing's move highlighted a dilemma in
attempting to curb inflation while also taking
care of the interests of state-owned oil giants.
And industry experts say price liberalization is
the only way out.
A diesel fuel shortage
was reported throughout China last week, from
eastern Shanghai to southern Guangdong province to
central Henan province and the national capital,
Beijing.
In Guangzhou, the provincial
capital of Guangdong, long lines formed outside
gas stations, with some drivers having to drive to
several stations to get their vehicles even one
quarter filled as some of the gas stations,
private and state-owned, were rationing diesel.
A similar situation happened more than two
years ago, with long lines at many stations in
Guangzhou, Shenzhen and other Guangdong cities and
many gas stations putting up signs that said "No
fuel" for about a month.
Media reports at
that time blamed China's state-owned oil companies
for trying to force the government to raise prices
by shutting down some of their refining capacity.
The companies, however, had to buy crude oil at
record high prices and sell refined products at
lower prices set by the government. The nation's
largest oil refiner, China Petroleum and Chemical
Corp (Sinopec), and PetroChina, the second-biggest
refiner, both denied the allegations.
The
recent fuel shortage is mainly caused by surging
world crude prices which have eaten into the
profits of oil refiners, some of which have chosen
to ration supplies or even halt diesel refinery
capacity for "maintenance".
The government
acknowledged the difficulties oil refiners are
facing. While announcing a price hike on domestic
oil products on October 30, it said the refineries
were losing 1,000 yuan (US$135) for every tonne of
oil refined from crude oil priced at US$80 a
barrel.
"The losses would be even greater
now as crude is at US$90 per barrel," a spokesman
for the National Development and Reform Commission
(NDRC) was quoted by China's state-owned Xinhua
News Agency as saying.
The recent fuel
price hike contradicted Beijing's earlier pledge
not to raise energy prices this year after the
consumer price index (CPI) hit 6.5% in August.
"As global crude prices and the CPI stay
at high levels, it is possible for the authorities
to seek a compromise by not raising fuel prices
but by giving subsidies to major refiners at the
end of the year," said Niu Li, an economist with
the State Information Center affiliated to the
NDRC, was quoted as saying by China Daily.
The CPI rose by 6.2% and 6.5% year on year
in September and October respectively, far beyond
the government's target of 3% for the whole year.
The NDRC said preliminary calculations
suggested the recent fuel price rise would result
in a 0.05% increase in monthly inflation.
"If based on a market-oriented pricing
mechanism, the domestic prices of oil products
should have gone up earlier in response to soaring
global crude price," said Deng Yusong, from the
Development and Research Council, a top government
think-tank.
Deng said, "[The move] enjoys
popular support among government deparments. If
the government had not made the decision, the
diesel supply crunch would have lasted longer and
got worse as crude oil prices soared to record
highs."
On one hand, the Chinese
government tried to allow the price hike to ease
domestic refineries' woes, while it also called an
emergency meeting with the nation's two main oil
giants, Sinopec and PetroChina, after the price
hike to discuss ways to ensure a steady supply in
the retail market and how to set fuel prices with
the least impact on inflation.
Following
the meeting, executives of the oil giants agreed
to expand refinery production and "ensure domestic
supplies", an NDRC statement said.
However, industry experts said a thorough
reform of the oil pricing system is the only
answer to the issue that has been frustrating
consumers and refineries.
Although in
theory prices of local processed oil products
should be in line with the average prices of oil
products in three major markets, Singapore,
Rotterdam and New York, in practice domestic
prices do not really directly track the world
prices nor reflect accurately market supply and
demand, said Deng Luwen, a Shanghai-based social
critic and editorial writer for Shanghai
Securities News and other mainland newspapers.
"As a result of the discrepancy in the
domestic prices and the real prices of crude oil,
the upstream oil companies have raised their
prices along with global oil prices, leaving
downstream domestic refiners to absorb rising
costs. That's why Sinopec and PetroChina,
monopolizing the upstream domestic oil industry,
have made profits, but domestic refiners suffered
a loss," Deng said. "As long as the oil pricing
mechanism remains distorted, fuel shortages,
partly engineered by the two state-owned giants,
will happen again and again."
Deng called
for the government to introduce a new pricing
system to better reflect global oil supply and
demand. "A mechanism based on international crude
oil price, instead of oil product price, will
better reflect global oil supply and demand. It
will not only make local consumers find the price
backed by international prices more acceptable,
but also it will relieve pressure on local
refineries," he said.
Crude rose to a
record high of $95.93 a barrel last week in New
York. Gordon Kwan, head of China energy research
at CLSA Ltd in Hong Kong, expects crude oil prices
to reach $100 a barrel soon.
Prior to the
recent price hike, diesel cost about $0.64 a liter
at the pump in Beijing, compared to about $1 in
Singapore and $2 in Britain, according to Reuters
news wire.
Ning Xiangdong, executive
deputy director of the National Center for
Economic Research at Beijing's Tsinghua
University, said that besides reform of the oil
pricing system, the government should create a
more competitive market, allowing private or
foreign firms to play a bigger role.
Sinopec and PetroChina have a monopoly of
the domestic oil market, controlling about 93% of
the oil refining sector and more than 90% of all
petrol stations.
Ning said the periodic
fuel shortages are a wake-up call for the
government to really open the oil product
wholesale market.
In accordance with World
Trade Organization commitments, the country has
already opened up the oil retail and wholesale
businesses, but it is still not easy for newcomers
to start a business, due to the complicated
requirements and the monopoly of Sinopec and
PetroChina in the wholesale business.
Olivia Chung is a senior Asia
Times Online reporter.
(Copyright 2007
Asia Times Online Ltd. All rights reserved. Please
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