NERVOUS BEIJING RAISES PUMP PRICES AS SHORTAGES BITE By Jamil Anderlini in Beijing
Monday, November 05, 2007
The murder of a man who jumped a petrol queue in China's central Henan province on Wednesday is the stuff of nightmares for the authoritarian Chinese government.
Faced with worsening fuel shortages across the country Beijing raised petrol, diesel and jet fuel prices at the pump by almost 10 per cent yesterday, in an effort to boost domestic supplies and exorcise the spectre of social unrest.
The policy reversal came as shortages spread to the capital, which is usually immune from the country's periodic supply crunches.
But the government is unwilling to allow prices to rise too much because of a morbid fear of spiralling inflation, which has a history of toppling governments in China and is currently running at a 10-year high, above 6 per cent.
In announcing the price increase the government said it would not allow rising fuel prices to be passed on to transport and other fuel-dependent industries but would provide direct subsidies to these sectors instead.
Soaring global crude oil prices, which were pushed above $96 a barrel in Asian trade yesterday – partly in reaction to China's increase – pose a serious dilemma for Beijing, which last raised its tightly controlled fuel prices in May 2006.
China is the second-largest crude oil consumer after the US and although it was a net exporter as recently as 1993 it now relies on imports for nearly 50 per cent of its crude supply.
The current shortages, particularly of diesel, result from a combination of high global oil prices and strict government controls, causing huge losses for Chinese refiners that must pay more for oil but cannot raise prices at the pump.
Even after this week's rise, wholesale petrol prices are equivalent to only about $76 a barrel in China, compared with the international average of $102, according to analysts.
The one-off price increase therefore appears to be a stopgap measure made by an administration that is betting falling international prices will eventually allow it to loosen its controls.
Analysts estimate Beijing could raise pump prices by another 10 per cent if global crude continues to increase but would not be able to lift them any higher, at least before the 2009 Olympic Games, because of concerns over the potential for street protests.
Many smaller Chinese refineries have shut down production rather than face losses and state-owned refiners such as Petrochina and Sinopec have been forced to take up the slack.
The government controls mean that Sinopec's break-even oil price is $60 a barrel, Wang Yongjian, chairman and president of Yanshan Petrochemical, Sinopec's largest subsidiary, told the FT in a recent interview.
Yanshan, which provides 60 per cent of Beijing's petrol, expects to lose more than Rmb1bn ($130m, £65m, €3m) this year and is likely to receive a direct government subsidy for the third year in a row. The government gave its parent company Sinopec $1.2bn in 2005 and $640m in 2006 in “one-off subsidies” to make up for refining losses.
“It is essential for the government to reform the fuel pricing system, and we hope it will happen soon,” Mr Wang said. “But it is very hard to reform pricing with inflation rising like it is.”
Analysts say the increasingly independent state oil giants are playing a high-stakes bluffing game with the government in which they chase profits by exporting refined products instead of supplying the domestic market.
This has created shortages that force the government to choose between doing nothing and risking incidents like the one in Henan, or raising prices at the risk of triggering a backlash among ordinary citizens that could escalate like the recent protests in Burma, which started as a reaction against a fuel price increase.
“The government will be under enormous pressure to keep fuel prices low at least until after the Olympics next year,” says Gordon Kwan, head of China energy research at CLSA in Hong Kong. “They can't have sad faces, let alone street riots or fuel shortages, in Beijing with Bush and Putin here to watch the games.”
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