China Frets Over Fuel

The government is trying to manage fuel price hikes as oil and inflation pressures rise.
By Michael Lelyveld
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China-fuel-305.jpg Truck drivers queue up for gas at a station in Sichuan, Nov. 9, 2010.

China's government is facing pressure from world oil prices as it battles inflation and soaring food costs.

On Feb. 20, the National Development and Reform Commission (NDRC) raised retail gasoline prices by 0.26 yuan per liter (15 cents per gallon), but the official Xinhua news agency called the increase "lower than expected."

Under the NDRC's price controls, retail charges can be adjusted if world market oil costs change more than 4 percent in 22 days.

But the price hikes for gasoline and diesel were less than half of the 10-percent increase allowed under the formula, according to data cited by Xinhua.

In a statement, the NDRC said the new rates were "limited" and "properly postponed."

The government, which has often shown reluctance to raise pump prices, is even more unwilling now because of raging inflation.

But the result is that refiners will pressure the government to cover their losses with subsidy payments, said Philip Andrews-Speed, a China energy expert in Edinburgh, Scotland.

"If your major political challenge is constraining inflation to avoid social unrest, then the government, which has the money, will pay the money," said Andrews-Speed.

Fixed-price blues

Insulating the public from oil shocks has been a perennial problem for the government, but its price control rules have often made matters worse.

In 2006 and 2007, fixed prices led to widespread shortages as refiners slowed supplies to avoid selling at a loss.

Although China's oil giants are state-owned, they are not government-run, showing a "high degree of independence," according to a study released this month by the Paris-based International Energy Agency.

In March 2007, the NDRC's then-chairman Ma Kai told the National People's Congress (NPC) that the government would reform its pricing system for energy, conceding that it "does not reflect its shortage and its cost for the environment."

But the reforms fell far short of free market pricing. The decision to adjust prices with a lag time continued to produce market distortions, disruptions and demands for subsidies.

It could also leave prices too high when world oil costs eased. Even though the latest increase was smaller than expected, China's pump prices are about 20 percent higher than those in the United States, Bloomberg News said.

But China's consumers could be facing more trouble, since the price hike came before the surge in world oil markets with uprisings in Libya and the Middle East. The timing is likely to create pressure for more increases to come.

In the past, China's refiners have chosen to export their fuel to higher-priced markets abroad rather than lose money at home, except when the government has pledged subsidies to prevent shortages.

"If the government quickly sets up a monthly payment system so the refiners know what's going to happen, then it can have a good chance of preventing them from playing games," Andrews-Speed said.

Inflation spurt

Expectations of future increases have often led to hoarding of fuel and sudden shortages, a syndrome the government will be eager to avoid.

But China is facing a spurt of inflation, which makes the government cautious about raising fuel rates to fully reflect market forces.

In December, the NDRC also increased fuel prices by about 4 percent after the costs of crude oil rose 9 percent in the previous two-month period.

Drought has driven up food prices, sparking public complaints at a time when the government is trying to rein in the real estate sector and keep housing costs from getting out of control.

In his online session with Internet users on Sunday, Premier Wen Jiabao said he "will not allow consumer prices to rise unchecked."

In January, consumer prices rose a smaller-than-forecast 4.9 percent from a year before, but only after the National Bureau of Statistics (NBS) changed its formula to reduce the weighting of food in the index. Food costs jumped 10.3 percent year-on-year.

The combination of inflation, rising oil prices, the approaching NPC session in March and the presentation of the 12th Five-Year Plan will make the government especially anxious to keep fuel prices and supplies under control.

"This is a very difficult political time anyway without additional oil price pressure and political events in the Middle East," Andrews-Speed said.


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