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China hikes fuel prices as global oil costs stay high

by Benjamin Morgan
Shanghai (AFP) May 24, 2006
China hiked fuel prices by more than 10 percent Wednesday to absorb sky-high global oil costs, a move that is expected to be repeated despite government concerns about the impact on inflation.

"China has raised the prices of gasoline, diesel, kerosene by 500 yuan per ton (62.5 dollars), effective today," the National Development and Reform Commission said.

It was the second hike in fuel prices authorized by the government this year as the key economic planning body sought to bring its system of managed domestic fuel costs more into line with international prices.

The announcement bumps up gasoline prices by 10.6 percent to 5,200 yuan a ton, with diesel up 12.3 percent to 4,570 yuan and jet fuel 10.3 percent higher at 5,340 yuan.

In March, the commission raised prices for gasoline by 300 yuan per ton and diesel by 200 yuan per ton.

Analysts said the move was widely expected but given the yawning gap between prices in China and global markets, consumers could soon expect more financial pain at the pump.

"We still have a 800 yuan per ton difference with global oil prices so we will have gradual price increases in the future," said Qiu Xiaofeng, an analyst with Everbright Securites in Shanghai.

Han Xiaoping, chief of Beijing-based energy consultancy Falcon Power, said the decision was necessary but would also clearly hurt many sectors of the economy.

"Its a painful price-hike for the government," said Qiu. "The 10 percent increase will (hit) the transportation industry, food industry and even grain (production)."

Beijing's decision came as tensions involving Iran, Iraq and Nigeria, as well as supply issues ahead of the US summer driving and Atlantic hurricane seasons, have converged to keep oil prices around 70 dollars per barrel.

When oil prices jumped to 70 dollar levels in August last year, Chinese refiners reduced or stopped buying oil overseas to stem the billions of dollars in losses they faced when forced to sell at home their products at as much as 40 percent below cost.

The actions of Sinopec and other refiners resulted in a supply crisis in July and August, which forced rationing and resulted in long queues at filling stations in the key southern business hub of Guangdong.

The shortages were clearly linked to China's capping of oil prices, a system aimed at cushioning the consumer against inflation -- a key worry for a government obsessed with macro-economic expansion.

In a bid to prevent a reoccurrence, the National Development and Reform Commission said Wednesday it would require China National Petroleum Corp and Sinopec to increase production of oil products to guarantee supply.

The commission also asked local administrations to guarantee that related industries do not suffer from the hike, including taxi drivers.

But in China's financial hub of Shanghai, where taxi fares were raised at the beginning of the month, drivers were already rueing their bad luck at having to again pay more at the pump.

"We drivers are all unfortunate," said Zhou Yunkang, a driver for Shanghai Bashi Taxi Company.

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