Oil price hikes put refiners in a bind

By Wang Yu (China Daily)
Updated: 2007-10-31 07:36

Soaring global oil prices have led to small refiners drastically cutting down on production - forcing Sinopec to fill the void.

Since the prices of refined oil products are set by the central government, the refiners - private or local-government-owned - find it unprofitable when the price of crude is as high as is now. Crude prices reached a record $93.80 a barrel at the New York close on Monday.

"Surging international crude prices are exerting mounting pressure on the local market (by discouraging small refiners). We are already running at full capacity to ensure fuel supply," Mao Jiaxiang, vice-president of Sinopec Economics & Development Research Institute, told China Daily Tuesday.

Sinopec is Asia's top refiner, feeding the bulk of fuel consumption in China. But due to capacity limitations at its plants, there is a rising gap between demand and supply.

Mao pointed out that fuel shortages are mainly triggered by the production drop at medium- and small-sized refiners scattered around the country, which contribute 5 to 10 percent of the country's supply.

The National Development and Reform Commission (NDRC), the top economic planner, keeps a tight lid on domestic fuel prices to fend off inflation, only allowing refiners to set prices within an 8 percent band of a government-imposed benchmark.

Sinopec will have more refining capacity on stream next year, which will help ease supply pressure, Mao said.

This year, it is believed Sinopec may import more oil products from abroad if necessary. The company imported 60,000 tons of gasoline in September and sold it at a lower price.

Gasoline retailers raised prices by 2.92 percent in the first nine months after crude costs climbed, the NDRC said in a statement on its website on Monday.

However, the NDRC said last month that energy prices will not be raised "in principle" this year after the consumer price index (CPI) hit a 10-year high of 6.5 percent in August.

"As global crude prices and the CPI stay at high levels, it is possible for the authorities to seek a compromise by not raising fuel prices but giving subsidies to major refiners at the end of the year," said Niu Li, an economist with the State Information Center affiliated to the NDRC.

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