China Hikes Fuel Prices

The delayed price hike comes amid pledges for fast action on energy reforms.
By Michael Lelyveld
2012-03-26
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Cars wait to fill up at a gas station in Nanjing, March 21, 2012.
Cars wait to fill up at a gas station in Nanjing, March 21, 2012.
IMAGINECHINA

China's government has pledged fast action on new energy reforms after complaints it has delayed enforcement of rules announced three years ago.

In his work report to the National People's Congress (NPC) on March 5, Premier Wen Jiabao promised rapid changes to promote conservation and end energy subsidies.

"We will promptly formulate and promulgate a work plan for appropriately controlling total energy consumption and move quickly to base the energy pricing system on the market," he said.

But how quickly the government will move remains a matter of debate, given its record in implementing rules already on the books.

2009 rules

In unusually public comments, the chairman of the state-controlled China National Petroleum Corporation (CNPC) said the government has been stalling on price increases for fuel under revised market measures announced in 2009.

Under the guidelines, the National Development and Reform Commission (NDRC) is supposed to allow fuel suppliers to raise retail prices when their costs for crude oil fluctuate more than 4 percent over 22 working days.

In practice, the NDRC has conceded it delays price hikes to control inflation or other conditions, leaving suppliers with losses that may be compensated later through retroactive subsidies.

The system, which leads to excess consumption and shortages, has been repeatedly criticized by the International Energy Agency and the World Bank.

Soaring costs

But on the sidelines of the NPC meeting on March 14, CNPC's chairman Jiang Jiemin added his voice in a complaint to reporters about soaring crude costs during a time of tensions over Iran.

"Oil prices should be adjusted, as the 22-day adjustment period has been met," Jiang said, according to Dow Jones Newswires.

The government raised retail fuel prices about 3 percent on Feb. 8, but Jiang said international prices had climbed more than 10 percent since then, the Beijing News reported.

The NDRC responded on March 19, announcing fuel price hikes of 600 yuan ($94.90) per metric ton, equal to 6.5 percent for gasoline and 7 percent for diesel, said the official English-language China Daily.

With the latest increase, 90-octane gas is selling for $1.17 per liter ($4.42 per gallon), Reuters said. China's price for regular gas is about 14 percent higher than the average in the United States due to differences in taxes and crude oil costs.

In Beijing, 93-octane gas has reached 8.33 yuan per liter ($4.99 per gallon), China Daily said.

The partial and delayed price rise is expected to head off steeper costs for CNPC and state refiner Sinopec, which lost a combined 64.6 billion yuan ($10.2 billion) on fuels in the first nine months of last year, according to Bloomberg News.

On Sunday, Reuters reported that Sinopec's refining losses totaled 37.6 billion yuan for all of 2011.

Adjustments

Officials have been considering changes to the NDRC pricing formula for over a year to allow more frequent adjustments, up and down. Fuel suppliers have been suffering negative margins on refining since the second quarter of 2011, Platts news service said.

The delays raise the question of what consumers and global markets can expect when Premier Wen uses words like "promptly" and "quickly" to describe the timing of energy reforms.

"I think everything is somewhat negotiable," said David Pumphrey, deputy director of the energy and national security program at the Center for Strategic and International Studies in Washington.

"It's all relative. You have 2,000 years of history, so 'promptly' may be different there," Pumphrey said in an interview.

On March 23, the State Council repeated the reform pledge, saying it had approved new NDRC plans for key sectors including energy, the official Xinhua news agency reported, but it gave no date for implementation.

Aside from motor fuels, China's balky price controls for electricity and other forms of energy have posed problems for conservation, which is key to curbing carbon emissions and climate change.

In his work report, Wen acknowledged that the government failed to meet its efficiency goal for last year, as energy use per unit of gross domestic product (GDP) declined 2 percent compared with a 3.5-percent target. Total energy consumption climbed 7 percent, the National Bureau of Statistics said.

"Targets for conserving energy, reducing emissions and controlling prices are not being met," said Wen. "Total energy consumption is growing excessively fast."

2007 pledges

But a comparison with Wen's work report in 2007 suggests the government's commitment to meeting its targets may have slipped.

In 2006, China missed its conservation goal by a similar amount, prompting a warning that the government would have to make up the difference during the remainder of its five-year plan ending in 2010.

"The targets cannot be revised, so we must work resolutely to reach them," Wen said in his 2007 report.

No similar statement appears in this year's address or in the NDRC's economic report to the NPC. Neither mentions the government's pledge to improve efficiency by 16 percent under the current five-year plan ending in 2015.

The effect is that the central government appears to have downgraded the importance of meeting energy and environmental goals.

David Pumphrey said he believes the government still has "a very strong commitment" to efficiency efforts because the targets remain embedded in its energy and economic plans.

But it may have made the judgment that the current five-year goal will be tougher than the last target for a 20-percent improvement, which it missed by a small margin.

China also faces greater challenges from slower economic growth, which may make it more concerned about the effects of energy costs on inflation and employment.

"They may say, let's not push it so far and cause destabilization," said Pumphrey.

"This time around there may not be the same kind of pressure," he said. "There's always this balance that has to go into it."

Last week, the NDRC also responded to complaints from taxi drivers about the latest fuel price hike, announcing it would pay them some 300 yuan per month in subsidies.

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