China hit by fuel shortages as supplies are cut

China’s main cities are beginning to face growing fuel shortages as oil companies cut supply into the fixed-price local market in response to rocketing global prices.

Over the past week, petrol stations in Beijing, Shanghai and Guangzhou have reported worsening supply shortages – especially of diesel oil – which has forced them either to ration their stocks or operate for only a few hours a day.

The creeping shortages, in spite of pressure on oil companies to increase supply, are leading to a situation similar to last autumn when Beijing was forced to raise prices by 10 per cent amid fears that fuel rationing was threatening social stability.

Some Beijing petrol stations have had lines of up to 50 trucks waiting for diesel. “Our diesel supply gets sold out in four or five hours every day and there is still a queue as far as the eye can see,” said the manager of a station in Tongzhou district.

The widening gap between international and domestic prices – about 20 per cent for petrol and 40 per cent for diesel – is placing a growing burden on the country’s public finances. HSBC estimates that if oil prices remain at $120 this year, the effective subsidy paid by China to maintain lower domestic prices could reach $27bn (€17bn, £14bn), or 4 per cent of the annual budget.

But few observers believe China will move quickly to raise prices and cut subsidies as Taiwan, Malaysia, Indonesia and India have done in recent weeks.

This is because China’s short-term priority is to control inflation, which reached 8.5 per cent in April. Most economists believe Beijing will move on oil prices only once it is confident of a downward inflation trend.

“The government will face huge political pressure if it raises refined oil prices in the near term due to high inflation and the earthquake,” says Ha Jiming, economist at CICC in Beijing. The country’s strong fiscal position gives it much more flexibility than many other Asian countries.

Although China’s pricing policy has been criticised for artificially stimulating oil consumption, some observers argue that higher prices might not actually damp demand. Much demand is not immediately affected by prices because rail bottlenecks leave companies with little choice but to move goods by road. Moreover, the current wave of shortages and rationing has artificially depressed oil consumption.

“We would actually expect to see higher product prices lead to an increase in Chinese apparent oil demand,” said Trevor Houser at New York-based consultancy Rhodium Group.

If there is a compromise in the short term, analysts say, it is likely to involve a cut in a windfall tax imposed on oil output, which would reduce pressure on the oil refiners. For instance, Sinopec’s first-quarter profits fell from $4.95bn in 2007 to $2.02bn this year because of losses on refining.