China puts lid on soaring oil prices

In spite of growing international pressure, subsidies are keeping fuel costs low in China – and feeding the thirst for crude oil, writes Mairtin O’Riada in Beijing.

Even though the price of crude oil has ballooned to record highs on international markets, China has remained curiously insulated from the global fuel crisis. Thanks to generous government subsidies and rigorous prices controls, pump prices across China have barely moved in months.
In January 2007, crude oil cost $47 per barrel. Ten days ago, it hit a record high of $139 per barrel. But in Beijing, drivers pay just 9 per cent more to fill their tanks than they did 18 months ago.

Beijing insists that the stringent controls are necessary. Speaking to a meeting of G8 energy ministers early last week, Zhang Guobao, vice-minister at the National Development and Reform Commission, maintained that keeping fuel costs low ‘‘serves social and economic stability’’.

At the same time, however, the cheap prices are seeing demand for fuel in China soaring. In a report released last week, the International Energy Agency estimated that China’s thirst for oil would grow by 5.5 per cent this year alone. That demand is being driven in part by soaring motor sales, up 17 per cent year-on-year, according to the China Association of Automobile Manufacturers.

That has led some international players to accuse China of driving up global oil costs, by sucking up scarce resources even as it keeps domestic prices low, an allegation that Beijing flatly rejects.

China’s oil refiners are already starting to feel the pinch of rising prices and increased demand. The biggest of them, PetroChina, last week announced that it would issue up to 60 billion yuan (€5.66 billion) worth of corporate bonds to raise cash. With Goldman Sachs predicting $200 a barrel for crude within two years, observers are now starting to ask how long Beijing can continue to underwrite bargain-priced oil.

Some say indefinitely, pointing to Beijing’s foreign reserves of €840 billion, some €17.5 billion of which was funnelled into subsidies for the oil industry last year alone.

Sunday Business Post