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China Lifts Fuel Prices, And Oil Falls In Response

Wall Street Journal [New York, N.Y] 20 June 2008: .1.

Abstract (summary)
The government, which controls domestic fuel prices, raised its base price for gasoline by 17% and diesel by 18%, a move that global oil traders quickly concluded could diminish the country's voracious appetite for fuel. Thursday's price hikes come just

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BEIJING -- China, widely seen as the one nation most responsible for the soaring demand and price of oil in recent years, reminded the world it can nudge both in the other direction as well. The government, which controls domestic fuel prices, raised its base price for gasoline by 17% and diesel by 18%, a move that global oil traders quickly concluded could diminish the country's voracious appetite for fuel. Benchmark crude oil on the New York Mercantile Exchange fell $4.75 a barrel, or 3.5%, to $131.93. The move, Beijing's second price increase since November and its biggest in four years, did what the U.S. has failed to do with its efforts to exert pressure on producers. Even when Saudi Arabia, the world's largest producer, last week floated the idea of increasing supply, prices barely responded. Thursday's global price drop is a measure of how the Asian giant is gaining game-changing market influence over a host of commodities, from oil to steel to coal. The complexities of the Chinese energy market may confound global traders, at least in the short term. Beijing's move could raise China's demand for oil imports at first rather than tamp it down, because Chinese refiners will likely ramp up their activity and reduce energy shortages in the country, now that they can charge higher prices. That could lead to global price gains. But Beijing's moves also will pass along to Chinese businesses and consumers some of the impact of surging energy costs -- something many international critics have urged China to do for some time, to spur them to restrain their energy use. "The oil markets have been reacting to forecasts that say after 2010, demand is going to keep rolling and supplies aren't," says Adam Sieminski, chief energy economist at Deutsche Bank in Washington. "So what China has done may not change things much in the short term, but it will make a huge difference to the psychology that says markets are out of balance going forward." Thursday's price hikes come just days before world leaders and oil executives meet in the Saudi Arabian city of Jeddah Sunday to discuss ways to bring record oil prices back to earth. In addition to international pressure, Beijing faces domestic concerns. Its gasoline and diesel refiners' profits were being squeezed by the high prices of the purchases and low government-set prices of their sales. Lack of domestic refining even made China a net importer of gasoline last month, for the first time on record. Similarly, power plants' losses have been mounting as they burn coal bought at market prices to sell electricity at a low state-set price, which also is being raised. Power shortages have been spreading, and more production would help prevent the possibility of blackouts during the summer, including when Beijing hosts the Olympics in August. The price moves don't do away with China's controversial subsidy regime altogether. But they are another in a series of similar steps in recent months toward market pricing, and Beijing has indicated it seeks deeper changes. Zhang Xiaoqiang, a vice minister of the National Development and Reform Commission, which sets fuel prices, said this week that "we are firm in our resolve" to overhaul the pricing, despite the country facing its highest inflation in a decade. Asia's other large consumers -- such as India, Indonesia and Malaysia -- all subsidize fuel heavily, but have risked popular ire in recent weeks to reduce those supports in order to protect state coffers. There may be other effects of Beijing's move. Higher energy rates will push up costs for Chinese businesses at a time when inflation is already a growing concern. That could potentially boost prices for the goods China supplies to the world as well. China last raised domestic fuel prices by 10% in November, when oil was around $90 a barrel. The new rises will take effect Friday. Base prices can differ from the prices at the pump. The National Development and Reform Commission said the increases will lead to average retail prices of about $1,095 a ton for gasoline, or about $3.06 a gallon. Electricity prices, also state-set, will rise an average 4.7% nationwide.

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China is the world's second-largest oil consumer, after the U.S., and is fast catching up. Its rapid industrialization has long been cited as a major driver of the years-long boom in global oil prices. With the sharp run-up in oil in recent months, Beijing's longstanding policy of fixing retail prices for gasoline, diesel and electricity has been getting unprecedented attention. Critics blame it for disrupting market signals, helping sustain demand for oil and coal and pushing prices higher. With inflation a growing worry world-wide, the political furor over China's price controls has threatened to supplant the longstanding tussle over its exchange-rate policies as the nation's most contentious international economic issue. U.S. Treasury Secretary Henry Paulson, point man in Washington's push to get China to raise the value of its currency, has been talking more about energy. He has urged Beijing to abandon its fuel-price controls, saying the U.S. found out the hard way in the 1970s that they don't work, and raised the issue again at this week's U.S.-China Strategic Economic Dialogue. "China's on the verge of being the main thing the U.S. blames for high oil prices, replacing the Saudis. It's close," said Trevor Houser, a China energy specialist at Rhodium Group, a New York-based consulting firm. "The people in Washington complaining about price controls are the same people talking about" the yuan, China's currency, he said. On Wednesday, 16 Democratic senators sent Bush administration officials a letter that blamed China's price controls for high oil prices and urged them to press China on the issue. Signers included former presidential candidate Sen. Hillary Clinton. "What Americans see happening at the pump is driven, in part, by what is happening in China," they wrote. Those tensions also will be on the agenda when Chinese Vice President Xi Jinping attends this weekend's summit of oil producers and consumers in Saudi Arabia. With the country facing more than 8% inflation, officials seem unwilling to expose Chinese consumers to the full brunt of global oil- price swings. There is deep concern over social stability, and the price increases were accompanied by announcement of programs to minimize their impact on the poor. Though high fuel prices normally encourage consumers to be more efficient, the nature of China's oil use, lack of options for consumers and the booming economy may tend to counteract the effect. Thus, experts have been warning in recent weeks that incremental price rises may not have the impact on demand the global markets expect. "If the economy is going to click along at 10% in China, you're going to have oil-demand growth, even at high prices," said Mr. Houser. High prices curb demand only if oil users can switch to less energy-intensive alternatives, and there aren't many of those in China now, he said. Most Chinese cities are poorly served by public transit, and with cargo rail lines often at capacity, diesel-burning truck transport is unavoidable for many businesses. "The continued fuel shortages that have beset the country since 2007 suggest that pent-up demand remains considerable," the International Energy Agency wrote in its latest oil-market report. Because of all that demand waiting in the wings, "oil demand growth in China could even accelerate if a retail price hike improved the supply picture," the agency said. After the last 10% price increase in November, the country's oil demand didn't slow significantly, and global crude prices have risen about 50% since then. "By raising domestic prices, the authorities are sending a strong signal to all refiners to increase production and potentially increase imports," said David Kirsch, an analyst at PFC Energy, a Washington oil-industry consulting firm. It isn't clear the latest price increases will completely put refiners in the black: Some analysts had estimated that would require a 25% price increase. But the news was enough to push up U.S.-listed shares of Sinopec by 8.1% and PetroChina Co. by 6.7% in late trading. Supplies of fuel could improve quickly because refiners and distributors seem to have been anticipating a price increase in recent weeks. The controlled prices gave them an incentive to build up supplies of gas and diesel, so they can cash in by selling at higher prices later. And though there are no firm figures on stockpiles, China's fuel imports have picked up recently. May's diesel imports were the third highest on record. That kind of behavior is one reason that analysts said the price controls add volatility to international markets. --Guy Chazan in London contributed to this article.

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Indexing (details)
Subjects: Locations: Classification: Title: Publication title: Pages: Publication year: Publication Date: Year: Publisher: Place of Publication: Country of publication: Journal Subjects: ISSN: Source type: Language of Publication: Document type: Subfile: ProQuest Document ID: Document URL: Price increases, Inflation, Energy shortages, Crude oil prices, Gasoline prices China, Beijing China 9179: Asia & the Pacific, 1510: Energy resources China Lifts Fuel Prices, And Oil Falls In Response Wall Street Journal A.1 2008 Jun 20, 2008 2008 Dow Jones & Company Inc New York, N.Y. United States Business And Economics--Banking And Finance 00999660 Newspapers English News Price increases, Inflation, Energy shortages, Crude oil prices, Gasoline prices 399078998 http://proxygsu-dal1.galileo.usg.edu/login?url=http: //search.proquest.com.proxygsu-dal1.galileo.usg.edu/docview /399078998?accountid=10403 (c) 2008 Dow Jones & Company, Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission. 2010-06-26 4 databases ABI/INFORM Complete National Newspapers Core ProQuest Newsstand The Wall Street Journal

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