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.

Brad DeLong, the Berkeley professor, star blogger and occasional FT contributor, has taken issue with a piece by my colleague Clive Crook on the US CAFE (Corporate Average Fuel Economy) standards.

Prof DeLong’s argument is that, while Clive may be right about the economics - you get an awful lot more fuel efficiency bang for your buck from taxes than you do from CAFE standards - he is being "naive" about the  realities of US politics.

He may have a point that unlike a higher fuel tax, a tighter CAFE standard could actually pass into law. Certainly it will be hard to rally opposition against a strategy that even the White House backs.

But on the other hand, the cost-effectiveness of a fuel tax is so much higher, at least if the figures from Mark Jakobsen of the University of California at San Diego are to be believed, that it is hard to give up on the politically unrealistic option. (Paper courtesy of the excellent blog Econbrowser, from two other economists, James D. Hamilton and Menzie Chinn, who add their own thoughts on the debate.)

Perhaps both sides should agree to rally around the powerfully-argued case for higher gasoline taxes made by Greg Mankiw, who is among other things a former chairman of the council of economic advisers for George W Bush.

What is going to keep US petrol prices - already at record levels - high in the future? Ethanol, according to oil industry pundits quoted in the New York Times. It is an elegant argument: targets to replace petroleum-based road fuels with biofuels cast doubt on the future profitability of oil refineries, which deters new investment, which keeps capacity tight and refining margins high. So if you think you are paying too much for your petrol in future, blame the environmenatlists and the farmers and the Bush administration, and every other supporter of ethanol, but not Big Oil.

It is a provocative thesis, which has attracted comment both negative and positive. But while ethanol may be part of the picture, it is far from being the only deterrent to investment in US refineries. Consumer journalist Christopher Platt suggests such investment just hasn’t been popular with shareholders. And there are plans for new investment by Marathon, for example, (full story requires subscription).

The clincher, though, is that refining margins are simply not the most important determinant of petrol prices: that is the price of crude, as this analysis at the Oil Drum blog makes clear. Other things being equal, the more biofuels the US can use to replace petroleum products, the lower the price of crude will be.

Oil prices are being driven higher by a general dip in US petrol supplies, as Ed Crooks wrote yesterday. This is one of those counter-intuitive abnormalities that makes energy fun or frustrating, depending on your disposition. But it’s true, even though you may be hesitant to believe Abdalla Salem El-Badri, Opec’s secretary-general, because he has reason to want to downplay any blame attributable to the cartel, which has recently restricted its oil output to push prices up. See the AP story here. Instead, believe US refiners who are privately admitting to having trouble performing their regular scheduled maintenance on time, and for that matter on budget.

What is interesting is the reason: The general lack of parts and labour in a market of high demand that is making it more difficult to do everything from drilling new wells to retooling refineries. Now if only someone would come up with a better explanation than ‘psychology’ as to why refining less crude into petrol should drive crude prices up, rather than down. If you do, please do send us a comment…

US crude oil and petrol (gasoline) stocks rose more than expected last week, according to the latest weekly figures from the US Energy Information Administration. At R-Squared Energy blog, Robert Rapier suggests the increase may not be enough to prevent the US going into Memorial Day with record low inventory levels. As Adam Robinson of Lehman brothers put it in his note released immediately after the figures: "gasoline finally builds east of the Rockies, but stubborn demand limits stock increase." The EIA’s conclusion:  "With gasoline inventories likely to remain low all summer, retail prices are expected to remain close to $3 per gallon during the entire summer season. Prices could rise again towards the end of summer if demand surges, as it often does, in late July and August." And if there is any further disruption to supplies, prices could go higher still.

UPDATE: For a characteristically hard-hitting view of what the summer might hold for US drivers, check out Matthew Simmons, author of "Twilight in the Desert", here.

US gasoline prices have been rising steadily since January, and are now over $2.85 a gallon on average, James D. Hamilton points out at Econbrowser, in a post that also highlights plenty of other useful data on the cost of motoring in the US.

He also provides an elegant explanation of what is going on: the increase is a result of the usual seasonal effect - prices rise as the summer driving season approaches - plus crude oil going from about $50 a barrel to over $67 for Brent today.

Another factor is the tightness of US refining capacity, which has sent refiners’ margins soaring. Lucas Herrmann of Deutche Bank, in the note on BP referred to in an earlier post, lamented the company’s failure to "take advantage of the current exceptional environment for US refiners".

UPDATE: The EIA figures for gasoline stocks show a continued decline, suggesting the upward trend is not going to reverse any time soon. The analysis gives some further reasons why gasoline prices are strong, and apears to have given up on last week’s suggestion that "it wouldn’t be too surprising to see prices began to stabilize or decline over the next several weeks."