China Fears Fuel Shortage

The government hopes an export ban will keep impacts of power shortages from spreading to diesel fuel.
By Michael Lelyveld
China-fuel-305.jpg Truck drivers queue up for gas at a station in Sichuan, Nov. 9, 2010.

China has ordered a halt to diesel fuel exports as it struggles with energy shortages stemming from price controls, experts say.

On May 13, the National Development and Reform Commission (NDRC) announced it would suspend all diesel exports except to Hong Kong and Macao. The agency urged dealers to boost imports and prevent price hikes from hoarding, state media said.

The move is an attempt to keep ahead of the growing impact from power shortages that have spread to some 20 provinces, autonomous regions and municipalities so far this year.

Experience with electricity problems in 2004 and 2010 has taught the government that businesses will start using diesel generators to keep the power on. The result has been fuel shortages, fear of price rises and long lines to buy more.

The ripple effects are the result of the government's reluctance to raise retail power rates as it battles inflation, giving consumers less incentive to conserve.

"This is a short-term and ultimately self-defeating strategy," said Trevor Houser, director of the energy and climate practice at the Rhodium Group in New York. "It exacts a significant toll on economic growth and is a poor way to combat inflation."

Part of the reason for holding the line on retail energy prices is that China has balked at fighting inflation by allowing its currency to appreciate, Houser said. But the cost of shortages is likely to be high.

Power producers have been running at a loss because of rising coal costs, while refiners have suffered similar problems because prices are higher abroad.

"When that happens, you have to prevent people from exporting diesel to take advantage of that price disparity," Houser said.

Past problems

Aside from anticipating the switch to generators, the NDRC's move comes before China's peak period for diesel in the agricultural and fishing sectors, the official Xinhua news agency reported.

The measure is also an attempt to head off a scarcity problem that has fed off itself in the past.

In 2004, high power demand under controlled prices first led to blackouts and then a surge of diesel use for generators. After that, fuel shortages kept trucks from supplying more coal to power plants, tying the country in a knot.

Price controls also help to create shortages because dealers expect there will be increases to come. In South China, traders have been hoarding fuel in anticipation of price hikes, the Platts news agency said.

China's shortages may also have some effect on world oil prices. The International Energy Agency (IEA) has estimated that the push for more imports could drive up global demand growth by 200,000 to 300,000 barrels per day.

In the electricity sector, China's five top producers have reported losses of 10.57 billion yuan (U.S. $1.62 billion) on thermal power plants in the first four months of the year, Xinhua said. In the absence of profits, the companies have little reason to generate more power.

The problems have been aggravated by drought, which has reduced output at hydropower facilities including the Three Gorges Dam, the official English-language China Daily reported.

'Delaying a solution'

If there is any good news in the dilemma, it may be that the government has anticipated the run on diesel fuel this time. But the bad news is that the export ban is no solution for the problem.

"It looks to me like it's simply delaying a solution," said Mikkal Herberg, research director for energy security at the Seattle-based National Bureau of Asian Research. "It's just one distortion that's being used to cover another distortion."

The government continues to deal only with symptoms of its energy problems without addressing price reforms, said Herberg.

"You're really not making any progress toward a more rational system," he said.

While the government may have learned to anticipate the spillover of power cuts into diesel shortages, so have businesses and consumers, magnifying the problems.

"It's wildly inefficient because people are going to have to keep huge hoards of diesel fuel in anticipation of these shortages each time around," Herberg said.

The effect of fuel hoarding and increased import demand in China and other countries will tend to drive up world prices, widening the gap with controlled retail rates and making the problems worse.

"It means that the external markets are going to be that much higher-priced and the distortions will be even more extreme," said Herberg.

On May 18, the NDRC announced it would raise "on-grid" power prices slightly by 0.02 yuan (U.S. $0.003 cents) per kilowatt-hour in Jiangxi, Hunan and Guizhou provinces to ease pressure on producers with smaller hikes scheduled for Henan and Hubei provinces.

The move means that some costs will be shifted to transmission operators, but so far there have been no plans announced to pass the increases on to consumers.

While the central government has been slow to respond, provinces may be starting to act on their own.

Beginning June 1, eastern Zhejiang province will impose a surcharge of 0.10 yuan (U.S. $0.015) per kilowatt-hour on big industrial users if their consumption fails to meet efficiency standards, Reuters reported. The charge would triple if usage exceeds standards by 100 percent, the news agency said.

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