China Increases Fuel Subsidies

Soaring oil prices have forced China to speed up subsidies for fuel suppliers as the cost of the government’s policies continues to grow, experts say.

2008-04-30
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A Chinese petrol station worker changes the fuel pricing on a board at a station in the southwest municipality of Chongqing early 01 November 2007. AFP
On April 21, the country’s two giant refiners—Sinopec and PetroChina—said they would begin to receive “appropriate” monthly subsidies to cover their losses from selling fuel at controlled prices, the official Xinhua news service said.

The state-owned companies did not specify how much they would get from the new compensation payments, which are retroactive to April 1.

Until now, China’s government has granted subsidies only once a year to make up for losses when fuel prices lag behind the cost of oil imports. On March 20, Sinopec announced the government had paid it 12.3 billion yuan ($1.7 billion) to help offset losses from fuel sales in 2007 and the first quarter of this year.

Sinopec said that it lost 13.7 billion yuan ($2 billion) on refining in the first quarter of this year alone, though, while PetroChina lost 20.1 billion yuan, according to a report by the Associated Press.

China deliberately keeps gasoline and diesel prices below world market levels to shield consumers, and allows only periodic increases. But this year, the government has approved no price hikes at all because of inflation concerns, while crude oil costs have climbed 40 percent according to U.S. Department of Energy and market reports.

‘Unsustainable’

In interviews with Radio Free Asia, analysts said that China’s decision to accelerate subsidies almost immediately after the huge payments in March is a sign that the government’s pricing policy is failing rapidly.

Philip Andrews-Speed, a China energy expert at Scotland’s University of Dundee, said “the gap between what the refiners are paying and what they’re receiving is just becoming more and more unsustainable.”

“[The government] can’t just expect companies to wait until the end of the year in the hope that they get the subsidy.”

Consumers also suffered from shortages as refiners cut supplies and sellers began to hoard gasoline.  The government has tried to fix the problem by promising more subsidies, refunding value-added taxes, and ordering refiners to supply more fuel before the Beijing Summer Olympic Games in August.

But analysts say the fuel-price freeze has sent all the wrong signals to the market by discouraging conservation at a time when China is trying to reduce oil consumption and pollution.

“With the low prices, there’s no incentive for consumers to use less,” Andrews-Speed said.

China’s low fuel prices are also encouraging consumers to buy more cars and to drive more often. At a recent Beijing Auto Show, Thomas Schiller of the consulting firm Arthur D. Little predicted that China’s fleet of 20 million passenger cars will nearly double to 39 million by 2010.

Conflicting policies

Mikkal Herberg, research director for the energy security program at the Seattle-based National Bureau of Asian Research, said the fuel price freeze works against all of China’s energy-saving and environmental goals.

“It’s another example of policies that are at cross-purposes here, and industrial policy [that is] at cross-purposes with their energy policy,” Herberg said.

More cars means more production by the same energy-consuming industries that China has been trying to rein in, including steel and aluminum. And more production by those industries also means more strain on China’s power supplies.

“The more you have cheap electricity prices and cheap fuel prices, the more you’re going to simply subsidize the energy-intensive industries. That’s what they’re doing in aluminum, steel, glass—all these industries that are heavily intensive energy users,” Herberg said.

Herberg said there will be a limit to the costs the government can continue to absorb.

“In the next 12 months, they’re going to be hemorrhaging subsidies on the order of $40 billion a year, just trying to subsidize consumption of oil.”

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

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