China raises prices of fuel amid nationwide shortage

For the first time in 17 months, China will raise wholesale price cap of gasoline, diesel and jet fuel, “to guarantee domestic supply of refined oil and promote energy conservation/为保证国内成品油供应，促进能源节约,” or so says the National Development and Reform Council. Per metric ton of all three refined products will go up 500 yuan, or roughly 10 percent, starting November 1.

China has kept fuel price steady even as world oil market continues to set new highs, seemingly on a daily basis. Oil is now over USD $95/barrel, up 50 percent year to date. One liter of diesel costs USD $0.64 in China, USD $1 in Singapore, and USD $2 in London.

Domestic refiners are bleeding red ink. Sinopec, China’s largest refiner, reported a USD $704 million loss in its refining segment during the past quarter. Given the economics, it’s not surprising Chinese oil companies are reluctant to invest in downstream operations to keep up with surging demand. Reuters is reporting widespread fuel shortages across China, especially diesel. Gas stations are rationing what little supplies they have left.

Don’t expect the situation to improve under the new pricing structure. Refiners will continue to lose money hand over fist. Consumers aren't likely to alter their driving behavior for what amounts anywhere between USD $7 to 14 extra a month. To make matters worse, China doesn’t have much maneuvering space for future price increases. Inflation is already running at 11 year high, another jolt from energy cost is the last thing China needs at this point. One possible solution is to have the government picking up the cost of energy subsidy. Beijing already rebates oil companies for some of their refining losses. But, to fundamentally address the supply demand imbalance in fuel, short of having a free market, China must take over the subsidy burden from the oil industry.

Jay Sheng is Shanghaiist's Business Editor. Email tips, news and gossip about business in Shanghai and China to biz at shanghaiist.com.