China Fuel Pricing Losses Soar

China’s government is paying record subsidies to keep fuel costs under control for consumers, but the policy is contributing to shortages and energy waste, analysts say.

Motorists travel along a busy commercial area of Central Business District (CBD) in Beijing on February 20, 2008. AFP
On March 20, China’s largest refiner said the government had paid it 12.3 billion yuan ($1.7 billion) to help cover its losses from selling gasoline and other petroleum products below cost, according to China’s official Xinhua news agency.

The huge subsidy for China Petroleum and Chemical Corp., known as Sinopec, was more than double the 5 billion yuan that the government gave the company at the end of 2006. Sinopec said that 4.9 billion yuan of the latest payment is to be counted in 2007, while 7.4 billion yuan is for losses in the first quarter of this year.

China’s refiners argue that subsidies are needed because they are forced to buy foreign oil at world prices that have risen to over $100 per barrel. But the government restricts price rises at the pump because of concerns about consumer costs and complaints, making Sinopec sell at a loss.

Another refiner, China National Petroleum Corp. (CNPC) said on March 21 that it had lost 36.2 billion yuan ($5.4 billion) last year, according to Xinhua. So far, CNPC has not won a subsidy, but offsets its losses on fuel with sales of domestic crude oil.

Energy experts have often criticized China’s fuel policy on the grounds that it interferes with the forces of supply and demand, reducing incentives to cut waste. Controlled prices also encourage China’s oil companies to sell fuel abroad at higher prices, creating shortages at home.

Many drivers felt the results in late March as lines formed at gas stations in eastern and southern provinces. Dealers rationed gasoline and diesel in many areas. A survey of stations in Shanghai found that over half were either rationing or had run out of diesel, according to Reuters.

Challenge ‘tougher now’

In interviews with Radio Free Asia, energy analysts said the challenge to the government’s fuel policy is now even tougher than in the past due to inflation, which hit an 11-year high in 2007. The government is also eager to avoid energy disruptions during the upcoming Summer Olympic Games, they said.

Philip Andrews-Speed, a China energy expert at the University of Dundee in Edinburgh, Scotland, said that “if inflation control is the top target, then [China’s government] just has to keep on paying money to the state companies that are making losses.”

“But it’s quite clear that the amount of money they are paying to Sinotec Ltd., the main refining company, is far from compensating for the losses,” he said.

Andrews-Speed said the government is also paying a higher cost for failing to deal with its policy problems while oil prices were still relatively low.

“Every year you say it’s more difficult, it seems to be more difficult the next year. The more they wait, the more difficult it’s going to be.”

Mikkal Herberg, research director for the energy security program at the Seattle-based National Bureau of Asian Research, said that with oil now priced at over $100 per barrel, China’s costs have soared to represent one of its economy’s biggest problems.

Other curbs?

“You’re looking at $30 billion-plus on annual rate of losses,” Herberg said. “It seems to me that’s on a scale that can’t really be sustained for the long term.”

Herberg said the government may see little chance to change its energy pricing policy before the Olympics. But it may hope to curb inflation in other areas so that it can lessen the impact of raising fuel prices afterward.

“I would guess that the leadership is hoping that over the next eight to 12 months leading up through the Olympics, they can begin to bring down the food price escalation, which has been the primary source of the inflation problem,” he said.

“If they can make some progress on food prices—bring that annual rate of inflation back down by the end of the year—they might feel more comfortable about beginning to do something about the fuel cost and subsidy issue.”

Herberg noted that controlled prices also work against the government’s campaigns to promote energy efficiency and curb emissions, because higher prices give consumers an incentive to conserve fuel.

“If oil prices stay where they are at $100 a barrel for the next year, it’s going to create a whole set of very difficult choices for the government,” Herberg said.

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


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