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Bad planning, conflicts of interest to blame: experts

Fuel shortages are beginning to take hold in China as the country lurches from the old, centrally planned distribution system to a more free-market approach, RFA reports.

Experts say fuel shortages that began in the eastern economic showcase of Shanghai in recent months have spread to other cities and provinces, with some filling stations still rationing certain kinds of fuel.

"There is still rationing going on, and it's now extended to Guangdong Province," Paul Wood, an analyst with Petroleum Intelligence Weekly in Singapore, told RFA correspondent Michael Lelyveld.

"But China cannot necessarily import to cover its needs to make up for these shortfalls because of a system of import quotas that the government has for importing diesel, and these are limited to mainly the state-owned companies such as Sinopec," Wood said.

"And they can import only a certain amount a year under licenses that they are given by the Beijing government at the start of the year," Wood said, adding that the quotas were to be phased out under an agreement with the World Trade Organization, but not until 2007 or 2008.

In the meantime, the companies will try to import more crude oil to turn into fuels. Then, it's a question of whether China will have enough refining capacity to meet domestic demand, he said.

But the implications for China go beyond the costs and inconvenience. Reports suggest that the problems began many months ago, and that China's monopoly oil companies simply failed to see them coming. Before the shortages struck, Sinopec and other Chinese oil giants were exporting record amounts of fuel to make a profit, both by selling at high prices abroad and by making supplies scarce at home to keep domestic prices as high as the government allows.

In part, the fuel shortages can be traced back to a wave of power shortages that struck Shanghai and other cities over the summer, forcing them to close factories and turn down air conditioning. Many factories bought diesel generators to produce their own power, setting the stage for fuel shortages that have now appeared.

According to a report the Russian news service Interfax, hundreds of independent filling station operators in the western municipality of Chongqing protested after their supplies were cut off during a fuel shortage.

But domestic downstream giants Sinopec and China National Petroleum Corp. (CNPC) say they were forced to guarantee supplies to their own dedicated outlets by central and local government officials concerned about public unrest.

China energy expert Philip Andrews-Speed at Scotland's University of Dundee cited wider problems connected to the dual role of China's oil majors as instruments of government energy policy, and as listed companies accountable to shareholders.

"I think one has to look at the bigger picture and say, well, somebody's done their sums wrong," Andrews-Speed said, adding that both overall oil demand and imports have grown rapidly in recent months, while Sinopec and other Chinese companies have been increasing their exports.

"Why have they been doing that? Because the price on the international market is higher than what they'd get at home," he said.

Centrally planned energy prices give oil companies little incentive to meet domestic demand, because they make more money on the international market, acting as free-market companies and selling at free-market prices abroad, analysts said.

"Sinopec, like the other Chinese companies, [is] really two companies...The problem is they have the same management, and the same management is responsible to different masters," Edward Morse, an adviser at Hess Energy Trading Co. in New York, told RFA.

"They behave in ways that enable them to bridge that gap," Morse said.#####


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