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China takes small step to closing oil price gap
By Benjamin Morgan
AFP
SHANGHAI
Petroleumworld.com 03 27 06China has taken a small step towards closing the gap between domestic and international oil prices, but there is a long way to go before government subsidies come to an end, analysts said Monday.
The National Development and Reform Commission (NDRC), a key economic body which regulates energy prices, said Sunday gasoline prices will increase by 300 yuan (37.5 dollars) per ton while the cost of diesel oil will rise by 200 yuan per ton.
The price hike, which took effect immediately, is aimed at boosting the profitability of refiners such as Sinopec and PetroChina, which have been forced to sell processed oils at far below levels paid on overseas markets.
"The move is aimed at balancing the strain on domestic refiners and on household incomes," said ING economist Tim Condon in Singapore.
To dampen the effect on end-consumers, Beijing also agreed to subsidize prices for some communities and public service sectors.
The recipients of the subsidies include grain growers, fishermen, farmers, state-owned forestry enterprises and urban public transportation firms.
The small price rises, which still put China's domestic prices at far below current international levels, are largely experimental, with regulators keen first gauge market reaction, analysts said.
"The NDRC will wait and see the market's reaction -- to see how well it's able to cope and then decide on the next move," said He Jun, an economist at Beijing-based consultancy Anbound.
Haitong Securities oil specialist Deng Yong said more incremental increases were likely, but even then refiners were still likely to lose money.
"The rise is not very much, and there is still space for more (increases)," said Deng. "It's good news for oil processing industry and they will suffer less but still lose money."
The decision to adjust prices follows months of squabbling between government regulators and state oil groups that were forced into the red as overseas oil prices soared to record levels in 2005.
Imported oil accounts for over 40 percent of the fuel-hungry nation's oil consumption, according to the government.
Although the Asian giant's largest oil group PetroChina last week announced record overall earnings for 2005, posting annual turnover of 552.2 billion yuan (68 billion US dollars), its refinery business made a 19.8 billion yuan loss.
In July and August, however, as oil prices rocketed to 70 dollars a barrel before falling to current levels or around 60 dollars, Chinese refiners revolted against the government pricing caps and refused to take on new supply.
A shortage of fuel in provincial manufacturing hub Guangdong in China's south soon emerged, creating kilometer-long filling queues.
Chinese authorities refused refiners' demands for price liberalization due to fears that any sharp tick upwards in inflation could stoke social unrest.
But in return the government paid out billions of yuan in subsidies to its refiners, with Sinopec, the country's largest processor of oil products, receiving 10 billion yuan from the Ministry of Finance.
New York's main contract, light sweet crude for delivery in May, was at 64.38 dollars a barrel Monday compared with 64.26 dollars in late trade Friday in the United States.
03/27/2006 08 05 GMT - AFP
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