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Crude oil plunge good for China's economy
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An overnight fall in the crude oil price on the New York Mercantile Exchange (NYME) is a good news for China's economic development and its industries, market analysts said.

Price plunge as risk weakens

The price of oil plunged more than 5 US dollars on the NYME on Tuesday after producers said Hurricane Gustav had wrought less damage than feared to Gulf of Mexico energy facilities.

The gulf is a major energy production location of the United States, providing 27 percent of the nation's crude oil and 20 percent of its natural gas.

Forecasters expected earlier that Gustav, the first storm of the 2008 Atlantic hurricane season, would pose a serious threat to offshore oil and gas installations in the gulf at the end of August. Its effect to oil production facilities proved minimal.

In reaction to this, the contract price of light sweet oil for October dropped 5.75 US dollars or 5 percent from Monday to close at 109.71 US dollars a barrel on Tuesday. It touched a five month low of 105.46 US dollars in intra-day trading.

The drop was accompanied by a slowing global economy that started this year and dragged down oil demand and consumption. The price of crude dropped about 26 percent from record 147.27 US dollars per barrel on July 11.

The latest fall indicated there was still room for the price to decrease and this would benefit China's economy to a certain extent, domestic market analysts said.

Ease inflation pressure

The "price fall of crude oil will help China to tame inflation, which is one of the country's biggest pressures currently," said Tang Min, the China Development Research Foundation deputy secretary general.

Because of booming economic development and severe natural disasters this year, the country's consumer price index (CPI), a main gauge of inflation, rose 7.9 percent in the first half over the same period last year.

This nearly doubled the country's target figure. Earlier this year, China set a target of limiting CPI to 4.8 percent for all of 2008.

"Prices of world goods and commodities have risen sharply this year amid surging oil prices, because oil is one of the most important raw materials and components of industry.

"Now, with the price drop, this means China, the world's second biggest oil importer and consumer, will pay less money to purchase from overseas markets," Tang said.

China's oil imports increased sharply amid a booming economy and surging demand. Last year, the nation imported 163 million tonnes of crude, up 12.4 percent over the previous year. This accounted for nearly 50 percent of the oil consumed nationwide, according to China Customs figures.

"Meanwhile, falling oil price pass on to other domestic industrials, and it will pull down prices of the whole industrial chain," Tang said.

According to National Bureau of Statistics figures, the producer price index (PPI) for the country's industrial products jumped 8 percent in the first seven months over the same period last year.

"China is expected to face less inflation pressure if the oil price continue to fall," Tang said.

Good for oil refiners

"A falling crude price is no doubt good news for domestic oil refiners, whose profits were squeezed by high world oil prices and a relatively lower domestic price," said Zhuang Jian, an Asian Development Bank economist.

"Refiners can buy cheaper crude from overseas markets if the price fell.This will help them to reduce business costs and increase profit fundamentally."

The country's oil companies have been losing money for each barrel of foreign oil they refined and sold to domestic consumers as they could not pass on the increase under the government-set refined oil prices.

China Petroleum and Chemical Corporation (Sinopec), Asia's biggest oil refiner, for example, saw its first half net profit fall 73.4 percent over the same period last year, dragged down by big losses in its refining sector.

The leading refiner confirmed losses of 46 billion yuan (6.7 billion US dollars) in its refining sector, despite receiving government subsidies of 33.4 billion yuan.

"Meanwhile, the surging oil price put the government in a dilemma. On one hand, oil refiners expect the country to lift the refined oil price. On the other hand, it fears a free refined price may spark severe inflation and harm other downstream industries," Zhuang said.

To solve the problem that resulted from soaring world crude prices, the government raised the benchmark gas and diesel oil retail prices to 6,980 yuan and 6,520 yuan, respectively, per tonne in June, up more than 16 percent and 18 percent. But it seems less useful to make up refiners' losses.

"In a long-run perspective, the country should adjust the refined pricing mechanism when the world price is relatively low.

"Raising the domestic refined price is not an easy job at present, which needs good timing. But a falling world oil price has made the issue easier to realize," said Zhuang.

(Xinhua News Agency September 3, 2008)

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