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ENERGY

China braces for leap in gas prices

June 09, 2008|Don Lee | Times Staff Writer

SHANGHAI — The lines are getting longer, and Tang Yao is finding fewer gasoline stations open in his neighborhood here. But the 48-year-old motorist has no gripes about the price at the pump.

While consumers in much of the world have been reeling from spiraling fuel costs, the Chinese government has kept the retail price of gasoline at about $2.60 a gallon, up just 9% from January 2007.

During that same period, average gas prices in the U.S. have surged nearly 80%, to about $4 a gallon. China's price control is great for people like Tang, who drives long distances in his gas-guzzling Great Wall sports utility vehicle.

But Tang and millions of other Chinese are bracing for a big jump in pump prices. The day of reckoning? Everybody believes it's coming right after the Summer Olympics in Beijing conclude in late August.

"Everything will change after the Olympics," said Tang, a real estate businessman, as he waited for an hour to fill up at a service station in a Shanghai suburb.

The reason, as most see it, is that the central government doesn't want to risk doing anything that could upset the populace before the Games, which open Aug. 8. China is already grappling with inflation running at an annual pace of more than 8%, mostly because of higher food costs.

"Before the Olympics, stability is paramount," said He Jun, an oil analyst at Beijing Anbound Consulting Co. He added that last month's earthquake in Sichuan province drove that point home for Chinese leaders and noted that large supplies of fuel are being diverted for reconstruction work in that area.

Other countries that subsidize fuel costs have boosted prices recently, in some cases stirring unrest. Protests flared late last week in India, where the government upped prices by about 10%, and there were calls for mass rallies in Malaysia after gasoline prices jumped 41% overnight.

China is the world's second-largest consumer of petroleum, behind the U.S. The nation's robust demand for oil, to support its booming economy and rising standard of living, has contributed to higher global prices and has prompted Beijing to scour the world for energy resources.

China relies on imports for roughly half its oil use, which is growing at about 7% annually. Global oil Friday topped $138 a barrel, double a year earlier. But China raised pump prices only once in the last year, in November, by a little more than 9%.

At a meeting of energy ministers in Japan over the weekend, a senior official at China's top economic policymaking body said the surge in crude prices should not be attributed to rising demand from developing countries such as China and India. Rather, Zhang Guobao, vice chairman of China's National Development and Reform Commission, blamed the high oil prices on speculators.

Refined-oil prices in China are half of international levels, leaving Beijing to shell out about $30 billion in subsidies in 2007, according to China International Capital Corp., an investment bank in Beijing.

The tab this year and next will be substantially more. Some analysts predict oil could hit $200 a barrel next year, partly because of constrained supplies.

But even worse than their draining effect on government coffers, China's price controls create market distortions and disincentives for consumers and businesses to reduce consumption and conserve energy, many analysts have long argued.

The transportation industry uses about half of the gasoline and diesel in China, while ordinary motorists accounted for 7% of gas consumption in 2006, according to China International Capital. But the number of car owners is growing rapidly.

"It would definitely be better if gas prices went up and people changed to smaller cars," said Li Xianglong, deputy chief at a Sinopec service station in Shanghai. The market distortions are significant.

Two state-owned giants -- PetroChina and China Petroleum & Chemical Corp. -- supply 90% of the gasoline and diesel sold through about 88,000 stations nationwide, researchers say.

PetroChina and Sinopec (as China Petroleum is called) also produce, refine and import oil. They buy crude at global prices but must sell at government-set levels. Although the companies are state-owned, their executives are nevertheless loath to sell at such a huge loss.

The upshot: They're holding back supplies until the government lets prices rise, some analysts say.

But Gong Jinshuang, a senior researcher at Sinopec in Beijing, said that the two big companies actually have been increasing supplies recently, in part to meet the big demand caused by rebuilding in the earthquake zone.

Motorists, he says, may be feeling a supply crunch because Sinopec and PetroChina, which also operate most of the filling stations, may not be delivering as much fuel to non-affiliated gas stations outside the earthquake zone. As a result, some gas stations have temporarily closed.

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