China Petrol Hike Not to Reduce Oil Demand

China's fuel price hike may not dent booming economy's hunger for oil, analysts say.

The jump in China's state-controlled fuel prices will inevitably squeeze consumers at both filling stations and grocery stores. But analysts say the hike is unlikely to make an immediate or huge dent in the country's hunger for oil.

China's economy is booming, and people are buying cars and air conditioners as their incomes grow. There is huge pent up consumer demand in a country of 1.3 bilion where per capita energy consumption is still far below wealthier countries.

Also, the price hike of up to 18 percent is likely to prompt refiners to boost production of crude oil, gasoline and other refined products. Previously, they had held back because they were losing money on the wide gap between global crude oil prices and state-set retail prices, which had created widespread fuel shortages.

"Do not expect an immediate fall in China's oil imports -- the price effect on demand will work in China as well, but it will take some time to work through," Wang Tao, an economist for UBS Securities, said in a report issued Friday.

Crude oil prices edged higher Friday in Asian trading -- approaching $133 a barrel on the New York Mercantile Exchange -- after tumbling the day before on news the National Development and Reform Commission would raise prices for gasoline and diesel fuel by 16 percent and 18 percent respectively.

Some analysts said the oil market may have overreacted to the news from China, with some traders buying oil futures on the belief that their climb will continue. "Whether domestic demand cools, or the price increase simply serves to bring more refining capacity on-line to satisfy China's voracious appetite, remains to be seen," said Jing Ulrich, chairwoman of China equities for JP Morgan Chase & Co.

Chinese drivers shrugged off the price hike as inevitable. "Maybe I might drive a bit less. But if it's for business, then if I have to drive, I will," said He Ping, a trading company employee who was refilling is VW Jetta at a Beijing gas station. "It's not that big a deal," he said.

In an explanatory note accompanying its announcement, the commission said that soaring oil prices had created "contradictions in the purchasing price of oil being higher than the selling price of refined products that were becoming more glaring by the day."

The government has been paying billions of dollars in subsidies to the country's two big state-owned refiners to make up for the losses. Many smaller loss-making refiners had shut down or cut back their operations.

The government hiked fuel prices by about 11 percent in November but had kept them frozen at that level, seeking to avoid adding to inflation, which has touched 12-year highs since the beginning of the year.

News of the price hikes lifted Chinese stocks Friday. The benchmark Shanghai index rose 3 percent, driven by a 4.6 percent gain in PetroChina and a 2.1 percent advance in Sinopec -- the country's two big refiners.

The hike raised the price of gasoline by 1,000 yuan ($145) per ton to 6,980 yuan ($1,015) -- more than 16 percent -- and diesel by the same amount per ton to 6,520 yuan ($949) per ton -- an 18 percent hike. Aviation kerosene rose by 1,500 yuan ($218) per ton to 7,450 yuan ($1,084), the commission, known as the NDRC, said on its Web site.

To protect individual consumers, the government said it would not allow any increases in bus and subway fares or taxi fares. Natural gas and liquefied petroleum gas prices will remain unchanged, and subsidies to the poor and to grain farmers would increase, it said.

Residential housing and farming and fertilizer industries will be exempt from a 0.025 yuan (0.0036 U.S. cents) per kilowatt increase in electricity rates for most businesses, the planning agency said.

The state-run newspaper China Daily said Friday that areas in Sichuan province, hit by a massive earthquake last month, were exempt from the increases. Still, the move is widely expected to boost inflation -- a major concern for Beijing. The hikes "will be quickly passed on to consumers through other channels, especially food prices in urban areas," said Vivian Chiu, an analyst at Merrill Lynch, said in a report.

China's inflation rate fell in May to 7.7 percent from 8.5 percent the month before, mainly reflecting lower food prices. But economists warn that higher costs for crude oil and other commodities pose a long-term threat.

Chinese officials bristle at suggestions that their country is a main factor behind the recent surge in global oil prices. Despite surging oil costs, the country's imports of both crude oil and oil products have surged to unprecedented levels as it builds up national stockpiles, while exports have plunged. Crude oil imports rose to 59.8 million barrels in January-April, up 10 percent from a year earlier.

Gasoline imports skyrocketed by nearly 20 times to 554,000 tons in January-May while imports of diesel jumped by more than nine times, to 2.9 million tons. "The government has to build up reserves for the sake of the domestic energy supply," said Han Xiaoping, chief executive officer of the China energy Web site http://www.china5e.com, an independent research organization. "After all, China is not the only country with such reserves," Han said.

Despite the surge in overall demand, China still consumes far less energy per each of its 1.3 billion people than the U.S. or other wealthy countries. Streets are dimly lit, apartment buildings often are illuminated by lights triggered only by movement or sound and ownership of private cars, though growing quickly, remains relatively low.

Pinched by surging costs for labor, land and materials -- as well as energy -- Chinese industries are finally beginning to cut back on the waste that has made them far more extravagant energy consumers than private citizens.

China Ocean Shipping (Group) Co., a huge state-owned shipping company, announced earlier this week that it was cutting the speed of its ships by 10 percent to help reduce fuel consumption and conserve energy.