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China Lifts Fuel Prices 10% as Shortages Bite

Reuters
Thursday, 1 Nov 2007 | 1:25 AM ET

China unexpectedly raised domestic gasoline and diesel prices by a tenth on Thursday, the first increase in 17 months, as officials rushed to tame a worsening supply crisis by easing losses at state refiners.

The move will help balance the books of Asia's top refiner Sinopec, which has shouldered mounting losses by selling fuel at the regulated, below-market prices that Beijing maintains to avoid inflation and social unrest.

Its U.S.-listed shares had soared over 10% from the previous day's close.

China announced the immediate 500 yuan per ton increase in prices on Wednesday, and said it also planned to adjust "seriously low" natural gas prices for drivers and some industrial users in the near future.

China Hikes Fuel Prices
Beijing hiked fuel prices by 10% to help ease mounting losses at state refiners which have been selling fuel below market prices. Paul Young, managing editor, Platts, speaks to CNBC's Arnold Gay.

Officials will hope the revenue rise will spur refiners to increase production and imports, heading off shortages that have caused queues, widespread rationing and at least one death, though the gap between local and global prices remains wide.

"It's better than nothing, but it will not yet change loss into profits," a refining industry source, who declined to be named told Reuters after the announcement.

The increase will boost gasoline prices by 9 percent and diesel by 10 percent, although rates are still only up by about two-thirds since early 2003. Crude oil prices have trebled since 2003, touching a new record at over $95 a barrel on Wednesday.

The increases are in line with Beijing's long term promise to free up prices of natural resources. But coming after a September pledge not to raise state-regulated prices this year, they were a surprising sign of concern over the fast-spreading shortages.

"Supply and demand contradictions, caused by the aggravation of the inverted price relationship between crude and domestic oil products, were getting more prominent daily," the National Development and Reform Commission said in a statement on its Web site (www.ndrc.gov.cn) announcing the price rise from Nov. 1.

"To ensure domestic oil product supplies, and encourage energy saving, the country has decided to raise oil prices."

Oil Demand Boost?

The pricing imbalance had pushed China into its worst fuel crisis in over two years, as tensions mounted between the government and its increasingly independent oil firms over who should pay for fuel subsidies, analysts said.

Refiners cut back on loss-making processing despite requests from Beijing to guarantee supply. As a result, diesel shortages and rationing this week reached the capital and spread inland from the coastal provinces where they started over a month ago.

A man was even killed in fuel-strapped Henan during a brawl over queue jumping at a service station, police there said. The government explicitly said it expects security of supply in return for the price boost, which could mean an increase in consumption in the world's number two oil user.

"(Refiners) should increase oil product output, PetroChina and Sinopec should increase diesel imports and strictly control diesel exports," the Commission statement said.

In recent years, cheap fuel prices have helped support China's rapid growth in consumer demand, in turn stoking oil's price rally. But the impact on demand of Thursday's increase is hard to gauge.

Past modest price rises have done little to dent use among the expanding middle and wealthy class of drivers.

Instead, they have sometimes had the opposite effect, analysts say, increasing estimates of oil usage by easing shortages, boosting the volume of fuel flowing to consumers.

"I don't see this having a significant impact on domestic demand because economic growth will continue to move ahead," said Julius Walker, oil market analyst at the Paris-based International Energy Agency.

Any demand hit may also be cushioned by support the announcement promised for worst hit groups, ranging from fishers and farmers to taxi drivers in cities.

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