G8 Presses China on Oil Prices

G8 nations are pressing China to end its fuel subsidies as oil consumption and world prices climb.

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BOSTON—China is resisting international pressure to raise its fuel prices as world energy costs soar, experts say. While China continues to subsidize fuel, its oil demand keeps climbing while consumption falls in much of the industrialized world, according to recent reports.

At a key meeting in Japan on June 8, China joined India, South Korea, and the G8 group of industrialized nations in an agreement to boost efficiency and fight rising energy prices.

But China clashed over its response to rising prices and failed to coordinate policies with the G8, which includes the United States, Britain, Canada, France, Germany, Italy, Japan, and Russia.

In a speech to energy ministers, Zhang Guobao, vice minister of the National Development and Reform Commission (NDRC), refused to budge on Beijing’s policy of paying Chinese refiners to sell fuel at prices that have been frozen since last November, while world oil prices have jumped by 50 percent.

The rate of inflation is quite high in China. It worries the government, and they don’t want to do anything to make it worse."
Robert Ebel

Zhang, who heads China’s Energy Bureau, rejected the argument against subsidies.

“Decisive factors for oil prices have run beyond the concept of supply and demand,” Zhang said, according to China’s official Xinhua news service. Zhang instead blamed market speculation and other factors, including exchange rates and geopolitics.

But China’s regulated gasoline prices are about 38 percent lower than average prices in the United States, according to data from Reuters and the U.S. Department of Energy (DOE).

China’s fuel prices are also about 40 percent below those in India and 20 percent cheaper than in Vietnam.

A report this month by the Paris-based International Energy Agency (IEA) found that China’s oil demand will rise by 5.5 percent this year to nearly 8 million barrels per day, more than the previously estimated 4.9 percent.

Other countries in the region have already eased their price curbs, but “only a large price adjustment in China has the potential to significantly alter the demand picture,” the IEA said.

In an interview with Radio Free Asia, Philip Andrews-Speed—a China energy expert at the University of Dundee in Edinburgh, Scotland—said that China’s government could allow a modest price hike after the Olympics. But he added, “I can’t see them rushing to bring it up in line with what’s happening in other countries.”

Inflation fears

China is widely expected to keep its price freeze in place through the Olympics and continue paying subsidies to ensure that its oil companies provide enough fuel for the events in Beijing.

But Robert Ebel, chairman of the energy program at the Washington-based Center for Strategic and International Studies—questions whether inflation fears will prevent the government from allowing higher prices even after the Olympics.

Last week, China’s National Bureau of Statistics said that consumer prices rose at a 7.7 percent annual rate in May, down from 8.5 percent in April but still far above targets.

“The rate of inflation is quite high in China. It worries the government, and they don’t want to do anything to make it worse,” Ebel said.

China may also be worried by the example of India, which suffered a wave of protests after a 10 percent increase in fuel prices in early June.

“China’s very much aware of what’s going on in India, and they’re aware that the same thing could happen in their own country if they’re not careful,” Ebel said. Social instability remains a major concern for the government, Andrews-Speed agreed.

“I think it would be sensitive about it, even without looking at India,” he said. “There are enough social disturbances in China for different socio-economic reasons that they wouldn’t need an external example to make them very cautious about it.”

Experts have urged China for years to target subsidies toward sectors of society that need them, rather than pay oil companies to furnish cheaper fuel to all consumers regardless of need. But the government has been slow to develop systems that can deliver aid to farmers and other specific consumers.

“China doesn’t have the social security infrastructure to provide what subsidies may be needed to agricultural workers or the poor who need access to cheap energy,” Andrews-Speed said.

“Until such institutions and mechanisms are in place, any government in China is going to be reluctant to raise oil prices significantly, I think.”

Original reporting by Michael Lelyveld. Edited for the Web by Richard Finney.

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