After Hike In China, Global Oil Prices Fall

By Ariana Eunjung Cha
Washington Post Staff Writer
Friday, June 20, 2008

SHANGHAI, June 19 -- China, the world's second-largest consumer of oil, said Thursday that it would dramatically raise domestic fuel prices after resisting international pressure to hike them for 7 1/2 months.

China's chief economic planning body, the National Development and Reform Commission, said gasoline and diesel would go up by 1,000 yuan, or $145, per ton -- 17 and 18 percent respectively. Aviation fuel, meanwhile, would rise by 1,500 yuan, or $218, per ton.

The official New China News Agency said that electricity prices would also rise for most businesses but that residential homes and some industries would be exempt.

The announcement sent oil prices tumbling on global markets, with traders anticipating that world demand would soften in response to decreased consumption by the Chinese. U.S. crude settled down $4.75, to $131.93, on Thursday on the on New York Mercantile Exchange.

"This is sort of like China putting a tax on energy consumption, which would have the effect to reduce the demand for petroleum products, ultimately to at least prevent further increases in the price of crude oil," said John Lonski, chief economist for Moody's Investors Services. "It should help to bring down prices and at least prevent oil from setting a new high."

Beijing's move came days after senior U.S. officials urged their Chinese counterparts to stop providing their citizens with government subsidies for fuel. During high-level talks in Annapolis this week, the U.S. delegation repeated its argument that subsidies were keeping fuel prices artificially low and discouraging the Chinese from reducing their use of gasoline, diesel and heating oil.

But Beijing's own concerns are not new. For the past year, China has been struggling with rising global oil prices and record inflation.

In November, China allowed fuel prices to jump 11 percent, to 5,980 yuan, for gasoline and 5,520 yuan for diesel but then pledged to freeze those prices as well as those for other daily necessities, such as pork and cooking oil, for the near future.

China's artificially low oil prices have been blamed for spurring shortages in its domestic market as oil companies hoarded supplies and refineries stopped processing oil to avoid losses. At the previous prices, domestic refineries were losing more than $100 for each ton of crude they processed.

The situation has caused stocks of China's oil companies to plummet in recent months. Shares of PetroChina, which in November became the world's first trillion-dollar company by one measure of stock market capitalization, is now trading at half its peak.

The fuel-price increase is the latest in a string of measures China has taken to cut its use of fossil fuels and raise energy efficiency. The soaring cost of energy and environmental damage due to its high use of oil and coal is threatening to derail the country's double-digit economic growth.

Analysts cautioned, however, that China's new pricing policies alone were unlikely to seriously curb the country's rapidly growing appetite for energy, which is widely considered to be one of the main factors driving the run-up in global oil prices.

"It's not going to make a big difference to consumption today, but it makes a huge difference in the psychology of where we're going to be in three to five years," said Adam E. Sieminski, chief energy economist for Deutsche Bank. "And everybody all around the world will need to do more things like this."

Staff writer Christopher Twarowski in Washington contributed to this report.

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