China Fears Fuel Spike

Government mulls price shift due to Iran threats.
An analysis by Michael Lelyveld
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A Chinese driver refuels his car at a gas station in Xianyang city, northwest China's Shaanxi province, Feb. 20, 2011.

China is examining plans for raising state-controlled fuel prices as it weighs the risk of disruptions in oil supplies from Iran.

On Feb. 8, state media reported that officials are studying quicker responses to market pressures after the National Development and Reform Commission (NDRC) hiked fuel prices for the first time since last April.

Aside from the 3.6-percent increase this month, the only other recent change came last October when the NDRC cut pump prices by about 3 percent after a long delay in reflecting world market trends.

China's price rules, which are meant to protect consumers, often wind up doing the opposite by failing to keep pace with market conditions, resulting in fuel shortages and losses for state-owned refiners.

Under the current formula, the NDRC only allows retail price changes after shifts of at least 4 percent in crude oil costs over 22 working days. In practice, the government has delayed action for far longer periods due to inflation, social concerns or industry subsidy demands.

Last year, the NDRC allowed gasoline prices to rise by only 6.4 percent although crude oil prices climbed as much as
38 percent, the official Xinhua news agency said.

Rules changing

But the rules may be changing as frictions with Iran threaten a surge in world oil costs that China's refiners would be unable to bear. Waning inflation may also make price hikes more tolerable this year.

In a statement, the NDRC said it would "shorten the adjustment period" for retail price adjustments and "accelerate the changes," Xinhua reported.

Adjustments could be made in as little as 10 days after swings in crude costs, said Zhu Fang, a marketing official at the China Petroleum and Chemical Industry Association.

Han Wenke, director of the NDRC's Energy Research Institute, said the government is even considering turning the price control function over to the oil companies, the official English-language China Daily reported.

The paper cited unnamed analysts, saying more price hikes are expected this year because of Western tensions with Iran.

Sudden jump

Proposed changes to the slow-moving price formula reflect concerns that refiners could not withstand a sudden jump in oil costs if Iran tries to block Persian Gulf exports through the Strait of Hormuz.

"It's not just Iran, but they're not prepared for any sudden sharp spike," said Philip Andrews-Speed, a China energy expert at the German Marshall Fund of the United States.

"That's clear and it's been clear to those who operate the system, I'm sure, for several years," Andrews-Speed told RFA.

On Monday, benchmark crude prices hit nine-month highs of over $105 per barrel in New York Mercantile Exchange electronic trading after Iran announced oil cutoffs to Britain and France, the Associated Press reported.

International sanctions and Iran's threats to oil deliveries appear to be spurring China's review of pricing policies.

Last year, China relied on Iran for nearly 11 percent of its oil imports, or over 570,000 barrels per day, according to customs data. Half of China's imports came from the Persian Gulf.

A shorter timeframe for price adjustments is still unlikely to mean that consumers would be exposed to the full costs of fuel in case of a conflict with Iran, due to the economic risks.

"I can't see that the government would just double the retail price of oil products if the crude oil price doubled," said Andrews-Speed. "They would allow some increase, but they would just have to put more money into the refining companies to constrain their losses."

Little expectation

Despite Han's statement about allowing China's oil companies to set prices, there is also little expectation that the government will switch suddenly to a full market system for fuel.

"Given that they're not really ready and the industry isn't structured for free market competition, it still implies that there will be some state influence over pricing," Andrews-Speed said.

Reformers, industry analysts and environmentalists have urged China for years to allow market pricing, arguing that competitive responses to supply and demand will reduce energy waste, shortages and pressure for subsidies.

But Andrews-Speed said a sudden move now could prove "extremely dangerous" because the market is dominated by two majority state-owned oil giants, China National Petroleum Corp. (CNPC) and China Petroleum & Chemical Corp. (Sinopec), restricting competition.

"The opportunities for collusion and price-setting against the interests of the consumer are huge," he said. "The government will realize that."

Even if the NDRC changes the rules for adjusting prices, the decision process may be no more predictable or public than it is now.

"I would still expect a lot of action behind the scenes to decide how much to raise the price and when," Andrews-Speed said.


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