After holding out for a year and a half, the Chinese government has at last bowed to the pressure of the crude oil market and raised the regulated prices of petrol, diesel and jet fuel by almost 10 per cent. Beijing is worried about inflation and the discontent caused by the rising cost of living. But the combination of soaring crude prices with regulated product prices meant the refiners were losing more than ten dollars on every barrel they processed. Sinopec, China’s biggest refiner, is said to break even at a crude price of $60 a barrel; $94 must have been killing it. Many small refiners shut down altogether, and the result was fuel shortages, with reports of long queues at petrol stations and rationing  spreading from the coast across the country to the  outskirts of Beijing. Ultimately the government seems to have decided that more expensive fuel is better than no fuel at all. Taiwan faces a similar dilemma.

The effect on the world’s oil market will in the short term be to increase demand. Those refiners that were offline will probably come back up to get a piece of the pent-up demand, and they will need more crude. In the longer term, though, rising prices may take some of the edge off the Chinese market, which is currently the single biggest contributor to the growth in demand for oil. Regulated product prices are a big reason why Chinese demand has been so robust as the price of crude has soared.

If, as Econbrowser argues, the rise in the price of oil is all about the balance of supply and demand, China’s move is one step towards reining in that demand.

October 31st, 2007 in China, Gasoline, Oil | Permalink