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Surging oil price adds inflation pressures
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After world crude oil prices spiked above a record 100 U.S. dollars per barrel during the first trading day of 2008, analysts said that China would see mounting inflation pressures but the impact would otherwise be limited. 

Zhou Dadi, an energy researcher with the National Development and Reform Commission (NDRC), said that the macroeconomic impact would be muted. Although China's oil consumption has been increasing, the major users were in the transportation and petrochemical sectors, which were somewhat better able to bear the higher costs. 


Light, sweet crude for February delivery rose 3.64 U.S. dollars to settle at 99.62 U.S. dollars per barrel on Wednesday, rising above its previous record close of 99.29 U.S. dollars set last November on the New York Mercantile Exchange (NYMEX).


However, crude briefly broke through the triple-digit batter for the first time ever during the day, triggered by concerns over tight supply related to Nigerian unrest, anticipation of a continued fall in U.S. stockpiles and the weak U.S. dollar.


As a major world oil importer "China is inevitably linked to fluctuations of international oil prices," said Wang Jian, a macro-economic analyst with the NDRC.


"Spiking crude prices would build up the country's inflation pressure, as a wide range of goods, including grain products, could see price hikes arising from higher oil prices," said Li Guohong, a senior analyst with the research center of Galaxy Securities.


The consumer price index (CPI), the major inflation indicator, hit an 11-year high of 6.9 percent in November, mainly on soaring food prices.


Li, however said the government should not raise refined product prices any further, despite the impact on inflation. China has raised the prices of refined oil products four times within about a year. The most recent hikes, driven by an earlier surge in world crude prices, lifted the prices of gasoline, diesel and aviation fuel by 500 yuan per ton, a rise of almost 10 percent, starting on Nov. 1.


Analysts believed these increases had played a role in driving the November CPI up from the previous high of 6.5 percent in October. The NDRC said the increases would contribute 0.05 percentage points to the monthly CPI figure.


Li said there would not be a similar mandatory increase ordered by the government this time around.


The high inflation rate, well above the official target of 3 percent for 2007, has become a major concern of the government, which is concerned about its impact on the poor. Chinese consumers have already begun to feel the pinch of soaring international oil prices, even though domestic prices are not directly linked to international prices.


"The burden of fuel charges is definitely becoming heavier," said Liang Huan, an Internet employee who drives a 3-year-old 1.6 L Buick Excelle. She said that since the November price hikes, she was spending an extra 100 yuan per month to fill up the tank.


As car ownership spread throughout China, consumers would more directly feel the pressure of higher world oil prices, the NDRC's Wang said. China had about 53.56 million vehicles in use by June 2007, including 32.39 million private cars, and car sales were growing at an annual rate of 20 percent.


"The most direct consequence would be that the country had to pay more for oil imports," said Deng Yusong, a researcher with the State Development Research Center.


China's economy expanded by 11.5 percent in the first three quarters, fuelling continuous demand for oil. The latest statistics showed China consumed 318 million tons of crude oil from January to November, up 7.3 percent year-on-year. About 46.25 percent of that oil came from imports, against 43.23 percent a year earlier.


China imported 147.1 million tons of crude oil in the first 11 months of 2007, up 14.76 percent year-on-year, according to customs figures. These imports represented 70.1 billion U.S. dollars of the trade deficit, up 18 percent.


Crude producers would benefit from the high international prices, but refiners would be hurt and might sustain huge losses, analysts believed.


Li of Galaxy Securities said that although the Nigerian unrest was the cause of much of Wednesday's surge, oil prices were also rising on the belief that world demand would outstrip supply.


Since world prices were likely to remain high, analysts said, China had to accelerate economic restructuring and promote energy conservation.


Zhou with the NDRC said the country had to establish a mechanism to encourage conservation and efficiency. The government should also further reform the energy pricing system so that domestic prices would rapidly adjust to international prices.


(Xinhua News Agency January 4, 2008)


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