Trying to deconstruct Chinese oil policy

June 20, 2008

china-fuel.jpgChina’s surprise decision late on Thursday to slash subsidies on fuel prices has been welcomed as a sign that Beijing is intent on reducing the pace of oil demand growth in the world’s second biggest energy consumer.

That, in theory, should help contain the upward spiral in world oil prices that took crude to a high of nearly $140 a barrel last week. Nine out of 10 analysts polled by Reuters immediately after the news took that line. But there is a contrarian view.

Previously unprofitable refining companies, obliged to sell at prices set by the state, will now be turning enough profit to fully meet transport fuel demand for the first time in weeks. Rationing and queues will be alleviated. Chinese refiners would then need to buy more crude, not less, from world crude markets.

The timing of the decision was a surprise. While other Asian countries had been easing subsidies, Beijing wasn’t expected to move until after the Olympics was safely out of the way, for fear higher prices might cause unrest.

The early decision may demonstrate Beijing’s confidence that it has social cohesion under control — a result of the positive reaction across the country to the government’s handling of the Sichuan earthquake and the Chinese perception of bias in Western media coverage of unrest in Tibet and the run-up to the Olympics.

The timing of the price increase also shows that Beijing is prepared to engage with other world powers on the global inflationary pressures that are threatening to slow Chinese economic growth.

Major oil producing and consuming countries are meeting in Saudi Arabia this weekend to discuss ways to reverse the rise of crude prices — China’s action on fuel prices ahead of the meeting permits Beijing to claim a leadership role in helping control oil prices.

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