China slashes fuel prices to tackle inflation

For the first time this year, China reduced fuel prices because of a slump in the cost of crude oil and also to tame inflation. According to the National Development and Reform Commission (NDRC), effective early October, wholesale prices for gasoline and diesel fuel were both reduced by RMB 300 (US$47.29) per metric ton. The price cuts represent a 3.5% drop for gasoline and a 3.9% drop for diesel fuel. Because of the deepening debt crisis in Europe and faltering growth in the U.S. economy which may result in lower export demand, China’s policy makers are beginning to keep inflation down. The Consumer Price Index (CPI) reached a three-year high of 6.5% last July. The eased to 6.2% in August.

Sinopec and PetroChina asked to perform national service

Gordon Kwan, Mirae Asset Securities Ltd.’s head of Regional Energy Research in Hong Kong, said that China is asking its two biggest oil refineries, China Petroleum & Chemical Corp. (Sinopec) and PetroChina Co., to perform national service by offering fuel at cheaper prices. With growing concerns of inflation, China’s fuel prices were not raised high enough last April and May, when global crude oil prices started peaking. Thus, China has delayed adjusting prices downwards when global crude oil prices started to decline. Bloomberg News reported that Chinese refiners may incur losses after the cuts, and that the government had already told the oil companies to ensure continued supply. Kwan added that the price cut could squeeze the margin for domestic refining for both Sinopec and PetroChina. He said, estimates that they will lose an average of US$6.5 for every barrel of imported crude oil refined into fuels. Sustained fuel price cuts are aimed at helping China lower the Producer Price Index (PPI) and CPI during the winter months. China usually adjusts the rates of gasoline, diesel fuel and kerosene when the moving average of three crude grades composed of Brent, Dubai and Cinta, change more than 4% in a span of 20 working days. But the NDRC said that China may now increase the frequency of fuel price adjustments and shift the global crude price benchmarks that it follows. (October 10, 2011)