Sun, Apr 24, 2005 - Page 12 News List

China still has trouble trusting the market

Energy shortages are the result of underpricing in sectors where the mentality of central planning still survives

NY TIMES NEWS SERVICE , Guangzhou

The Sinopec service station nearest the Canton Trade Fair in Guangzhou, China, had signs on all its diesel pumps last Friday, saying they were sold out of fuel, though the gasoline pumps were still flowing. Service stations across China are starting to run short on diesel this spring, while electricity blackouts here in southeastern China are growing worse as power stations cut back on purchases of fuel oil.

PHOTO: NY TIMES

Service stations across China are starting to run short on diesel this spring, while electricity blackouts here in southeastern China are growing worse as power stations cut back on purchases of fuel oil.

For truckers and factory owners, the diesel and electricity shortages are a nuisance, sometimes a costly one. The Guangzhou Boaosi Appliance Co., which makes refrigerators here, is without electricity from the municipal grid four days a week, and just bought a costly generator last month to continue operating on diesel.

The diesel and power shortages have one thing in common: they are largely the result of the clash between China's Communist past and its increasingly capitalist present. The government has set retail prices too low for diesel and electricity. So businesses, facing high world oil prices, are supplying less of both.

Disruptions in Chinese markets for fuel oil, diesel and other oil products are causing ripples in global markets in turn, as traders and investors around the world struggle to interpret the effects on international oil supply and demand.

The puzzle for oil analysts is how Chinese households, factory owners and refinery managers will react when the government eventually liberalizes prices, which is expected in the next few weeks. Government officials have already announced that they will raise retail electricity prices for industrial users, although probably not homes, on May 1. An increase in diesel prices is also widely expected.

As buyers of everything from cotton pajamas to construction equipment gathered here from around the world Friday for the opening of the two-week Canton Trade Fair, the nearest Sinopec service station had signs on all its diesel pumps saying they were sold out of fuel, though the gasoline pumps were still flowing. A couple of trucks loitered nearby. In contrast, lines of trucks waiting for diesel have been reported at scattered service stations elsewhere in China over the last few days.

The Chinese government raised the regulated retail price of gasoline by 7 percent on March 23, to US$1.66 a gallon. But it left diesel unchanged at US$1.57 a gallon to avoid antagonizing farmers, who need a lot of diesel in their tractors for spring planting.

Speculators across China have responded by hoarding diesel in the expectation of a price increase after the planting, said Evan Jia, a spokesman for Sinopec, China's main refiner.

To make matters worse, refiners shifted at the end of last year toward producing more gasoline and less diesel from each barrel of oil. They have refused to go back on that decision, even stepping up exports of diesel in response to low prices at home.

"We do not want the marketplace to give us indications" of how much diesel to produce, when it is hoarding that is driving the market, Jia said.

At the same time, half of the fuel oil-fired power stations here in Guangdong province have been closed for part or all of the last month. Global prices for fuel oil, a heavy oil not used much in the West but relied on by the Chinese to power many electric plants, have climbed sharply, but power companies have not been allowed to charge more for the electricity they produce; the government-controlled Shenzhen Daily recently reported that fuel-oil imports had dropped by half last month.

A small increase in diesel and electricity prices could have the counter- intuitive effect of increasing China's oil imports, said Jeff Brown, an oil demand analyst at the International Energy Agency in Paris.

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