China sharply hikes energy prices

Vehicles queue at a service station in Chengdu in China. The Chinese government has raised petrol and diesel prices by more than 16 per cent from Friday to reduce the gap with soaring international oil prices. (AFP)

China sharply raised domestic energy prices across the board on Friday, as authorities shifted policy in the face of complaints that price controls were causing turmoil on global oil markets.

The move immediately sent oil prices tumbling, in a sign of China's growing impact in the global economy. But analysts said it was far from clear what the long-term effect would be from the surprise move announced late Thursday.

The move came just two days before an international "oil summit" in Saudi Arabia called to discuss the soaring cost of oil, which has wracked stock markets and, in some places, led to protests that have unnerved governments.

China hiked retail petrol and diesel prices as much as 18 per cent as the government moved to close the gap between state-set domestic prices and the soaring world oil market. Electricity costs were also raised.

The Chinese government, which has made taming inflation its top economic priority, imposes strict controls on energy prices due to fears that higher fuel or power costs could worsen inflation that is already near 12-year highs.

But the centralised pricing system and rising international crude costs have left domestic oil companies saddled with huge refining losses and led to mounting calls for the government to loosen price controls.

China, the world's fourth-largest economy, accounts for around 40 per cent of the increase in world oil consumption to fuel its economic growth – and analysts expected the hikes to cut back on that demand.

"I think it's very significant," said Dave Ernsberger, Asia director of global energy information provider Platts. "It is going to eat into demand. I'm pretty sure of that."

But he cautioned that the longer-term impact would not be clear until around September or October, when Chinese demand data is released and the market can digest it.

Oil, which has kept smashing through to new record highs since breaking the $100 (Dh367) level earlier this year, dropped $4.75 a barrel in New York on Thursday after the announcement from China.

It was back up 12 cents in Asia on Friday at just over $132.

The price controls in China, the world's second largest oil consumer after the United States, have been blamed for distorting global markets, which have been in turmoil for months.

Wholesale petrol and diesel prices were raised 1,000 yuan ($145) per tonne while aviation kerosene was hiked 1,500 yuan a tonne, the National Development and Reform Commission said.

Retail prices of diesel and petrol were hiked to 6,520 yuan and 6,980 yuan a tonne, increases of 18 per cent and more than 16 per cent respectively.

The rises would mean an increase of 0.92 yuan and 0.8 yuan a litre (51 cents and 44 cents per US gallon) for diesel and petrol, state-run Xinhua news agency said.

Chinese share prices closed 3.01 per cent higher on Friday as the hike boosted oil and utilities stocks.

It was hard to estimate what the effect would be on China's consumption but past increases have been shrugged off, said Deng Yong, a Shanghai-based oil analyst with Haitong Securities.

"In the past, when prices have gone up by 200, 300 or 500 yuan, consumption of oil products has nevertheless gone up," he said.

"So now that it's up by 1,000 yuan, it's really hard to say what will happen in the short term. After all, the demand is still huge."

But Beijing drivers were not happy. Simon Yang, a 37-year-old cosmetic shop owner, said the hike would hit his business directly, as he often used his private car for deliveries.

"It's certainly not reasonable, especially when other prices are so high," he said. "Everything will rise following the gas price hike."

In a bid to appease those most affected by the price rise, the finance ministry on Friday said it would allocate 19.8 billion yuan ($2.9 billion) in subsidies.

Of that, 7.8 billion yuan will go to grain producers and the rest to other sectors such as taxi drivers, the ministry said, according to Xinhua news agency.