China fuel crisis spreads

BEIJING/SHANGHAI Wed Oct 31, 2007 5:44am EDT

People wait to buy diesel fuel at a gas station in Hangzhou, east China's Zhejiang province, October 30, 2007. REUTERS/Stringer

People wait to buy diesel fuel at a gas station in Hangzhou, east China's Zhejiang province, October 30, 2007.

Credit: Reuters/Stringer

BEIJING/SHANGHAI (Reuters) - China's worst fuel crisis in two years spread to the capital and other inland areas by Wednesday, and one man was killed in a brawl at a petrol station queue, upping pressure on the government to intervene.

Diesel shortages in China's political heart, which escaped previous supply crunches unscathed, highlight tensions between the government and its increasingly independent oil firms about who should pay for the country's generous fuel subsidies.

Top refiner Sinopec on Wednesday pledged more supplies and bought additional diesel fuel abroad, but it may fall to Beijing to end the stand-off by raising domestic prices, easing taxes, promising another year-end pay-off -- or simply strong-arming suppliers into selling more fuel at a loss.

"Sinopec will work hard to resolve the diesel supply tightness," a headline in the company paper announced. Even so, at least five of its Beijing stations were rationing supplies.

At stake are profits for oil majors Sinopec and PetroChina from selling motor fuel in the world's second-largest consumer, where pump prices have not been raised in 17 months even as crude costs hit a series of record highs.

In scenes reminiscent of the weeks-long shortages in summer 2005, also caused by the yawning gap between domestic prices and global crude costs, petrol stations across the country were turning away trucks and rationing supplies.

After striking the southeastern coastal provinces and the financial hub of Shanghai, they are now hitting the interior, managers and local media say.

In Hefei, the capital of eastern Anhui province, independent suppliers had almost all run out of diesel and several controlled by the oil majors were rationing supplies, station workers said.

"We don't have diesel today. Supply has been quite spotty. Long lines in front of gas stations are very common these days in Hefei," a manager surnamed Yang told Reuters by telephone.

A man was killed in fuel-strapped Henan during a brawl over queue jumping at a service station, police said. Parts of Hunan and Hubei provinces also face shortages, media reports said.

SOCIETY VERSUS MARKET

Beijing worries that more costly energy could push up already-high inflation or spark unrest, and effectively forces its refiners and retailers to subsidize state-set prices.

Diesel costs about 64 cents a liter at the pump in Beijing, versus around $1 in Singapore and $2 in Britain.

But a recent rally in global crude prices to above $90 a barrel has deepened large firms' losses and made them ever more reluctant to keep markets supplied.

A source at PetroChina said the company would lose 1,500 yuan ($200) a tonne by selling imported diesel at Chinese pumps.

"The crux of the problem is the state-owned enterprises... you see the remaining contradictions of the state sector in the market economy," said Joseph Yu-shek Cheng, political science professor at the City University of Hong Kong.

"On the one hand they understand that they have to assume certain political responsibilities, but at the same time they have to look after their own company interests."

Underlining the key role of pricing in the shortage, shipping companies in badly hit Zhejiang province said they had no problem securing supplies if they were willing to pay above-market prices to independent traders.

After China's last major fuel crisis in summer 2005, when queues stretched for hours, Beijing cracked down heavily on a flow of exports that firms were using to ease their bottom lines, rescinding tax breaks, among other things.

But this time round, with diesel exports just a tiny fraction of consumption, the shortages may be more difficult to solve without direct subsidies, price liberalization -- or a more overt political crackdown on the recalcitrant refiners.

SILENT PROTEST

With current retail prices most plants only break even when crude is around $65 a barrel or lower, so soaring markets have forced many independents out of the market. The burden of making up the difference has fallen on the state-owned companies.

Sinopec has raised imports and refining in November, and analysts expect it will get another tranche of cash from the government at the end of this year to offset its losses. Beijing gave it $1.2 billion in 2005 and $640 million in 2006.

An industry source said Sinopec had bought another 30,000 tonnes of diesel for import in November to the hardest-hit southeastern coastal areas. And it will boost refinery runs by 800,000 tonnes next month, a company paper said.

But a Sinopec official told Reuters on Tuesday that its largest refinery will switch off a crude unit in November and process 3 percent less crude than the previous month, sending a signal to Beijing in a move that could worsen the shortage.

"It's ridiculous to shut down plants at a time of razor-thin supply," one source remarked. "I guess it's a silent protest for the central government to raise pump prices."

(Additional reporting by Felicia Loo in Singapore and Langi Jiang in Beijing)

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