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Rising Oil Prices Won't Derail Economy

Bench market crude oil futures touched US$40 a barrel last week, the highest finish since the 1991 Gulf War, amid concerns over Middle East security and tightened US supplies. The price eased Monday with growing expectations that the Organization of Petroleum Exporting Countries (OPEC) will soon increase supplies in order to offset surging prices.

Experts said the oil price rise backs strong performances by the three largest domestic oil majors including PetroChina, Sinopec and CNOOC.

The profits of the three companies are expected to rise by an average of 7 to 8 percent on every dollar per barrel rise in the crude oil price, they said.

If the strong momentum continues, the full-year profits of the companies are likely to jump 20 to 30 percent.

"A high oil price sustains the exploration and production business," said Li Zhipeng, an oil analyst at Xiangcai Securities.

Petrochemical product prices increased as much as 30 percent since last year and the performance should continue throughout this year with high oil prices and recovering demand, said Li.

Chinese oil companies have already benefited from the price rise last year, with an average year-on-year profit rise of 37.4 percent. The oil giants' profits account for one quarter of China's industrial profits.

The surging crude oil price, however, might be a nightmare for airlines and raw materials users.

Although the government allows airlines to add a premium on flight charges, it does not always cover the increase in fuel costs, experts said.

International freight rates for dry cargo have nearly doubled on the high oil prices, and the increase in shipping costs is pulling up prices for such materials as iron ore, alumina and fertilizer.

For instance, the CIF (cost, insurance and freight) price for Russian kalium fertilizer has jumped nearly 40 percent from last January to the current price of US$165 per ton.

But some experts said that impact of rising oil prices on China's economy won't be harder than it is on developed economies, because of "China's relatively low dependence on crude oil and the low inflationary pressure." Oil consumption constitutes only 20 percent of the nation's total energy mix, compared with 55 percent in Japan and 40 percent in the United States.

The experts also said that the government would not raise the domestic retail prices for oil products such as diesel and gasoline immediately.

China has pegged its domestic refined oil product rates to the averages in Rotterdam, New York and Singapore. Sinopec and PetroChina, the only two authorized wholesalers of gasoline and diesel, are allowed to raise or drop their retail price by 8 percent from the government benchmark.

The National Development Reform Commission raised benchmark gasoline rates by 300 yuan (US$36.30) a ton, or 8 percent, in March, but kept prices of diesel unchanged.

"The government wants the price to be stable," said Shan Hongqing, an expert with the Economic and Development Research Institute of Sinopec. "Either a high or low price will hurt the national economy."

Shan also said the claim that the strong oil demand from China has fanned the global oil price rise is exaggerated.

Earlier this year, the Paris-based International Energy Agency said China's breakneck economic growth, leading to record oil imports, has aggravated this year's surge in world crude prices.

(China Daily May 11, 2004)

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