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China's fuel shortage questioned

"It's an artificial shortage."

Sam Dale, an Asian oil analyst in Singapore with Energy Intelligence

Sudden shortages of gasoline and diesel in Southeastern China are reigniting a debate here: Is pressure from state companies, coupled with freely available information on oil prices, driving China to accept market forces faster than it may have wanted?

Dozens of service stations in Southeastern China, notably in cities near Hong Kong, abruptly ran out of fuel this week just as officials in Beijing were debating requests from domestic oil companies to charge more for diesel and gasoline. The shortages have produced long lines of angry motorists at service stations and even freight disruptions, as trucks do not have the diesel to make trips.

Some in China and abroad say the state oil companies created the shortages to increase prices. China regulates retail fuel prices, adjusting them no more than once a month. But the government has not raised them nearly as quickly as world oil prices have risen, hoping to keep inflation in check. This has left refiners with negligible profit margins, and even losses, as they convert oil into gasoline and diesel.

State-controlled China Petroleum and Chemicals Corp (中石化), also known as Sinopec, which dominates the refining of fuel in China, said late on Wednesday that the shortages were the result of people stockpiling fuel now that they have enough information to bet on the direction of oil prices.

Asked if a shortage had been deliberately created, Evan Jia, a spokesman for Sinopec, said, "We try our best to supply the marketplace."

People in China today have much greater access to information about world prices than ever before, and as they see high world oil prices, they are topping off fuel tanks in expectation that China will soon raise domestic prices, Jia said.

While there are no reliable figures on the private storage capacity of fuel in China, oil experts say it is probably considerable as years of electricity shortages have prompted factories across the country to install backup diesel generators with large fuel tanks.

Typhoon Matsa and tropical storm Sanvu have also disrupted tanker deliveries to Southeastern China in the last two weeks, Jia said.

Sinopec is a conglomerate of nearly 10,000 formerly separate oil production, refining and distribution entities, previously under the direct control of local, provincial and central government agencies and still somewhat influenced by them.

"Refineries do not want to process the crude -- we try our best," Jia said.

But the timing of the latest shortages, coinciding with an active debate in the government-controlled news media over whether China should liberalize retail energy prices, has made many energy analysts suspicious of these rationales.

Sam Dale, an Asian oil analyst in Singapore with Energy Intelligence, a newsletter-publishing company based in New York, said oil companies appeared to be putting pressure on the Chinese government to free retail prices, by running their refineries below capacity and holding back supplies from the market.

"It's an artificial shortage," he said.

Jeff Brown, an oil-demand analyst at the International Energy Agency in Paris, said retail prices had not been high enough in China to cover refiners' costs for many months. He said it was mysterious that the shortages appear to be worse now than under similar conditions in April.

Chinese refiners' razor-thin margins have not changed much in the last few months, Brown noted. The margins narrowed last winter. Since then, they have remained narrow because rising world oil prices in US dollars have been offset by more slowly rising retail prices in China and last month's 2 percent increase in the value of China's currency.
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