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Oil Price Increases Unlikely to Cause Inflation
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The recent increase in the price of oil products in China by at least 10 percent is unlikely to lead to inflation, analysts say.


"I am not worried about inflation - the Chinese economy is developing steadily," said Zhou Fengqi, an energy expert who previously worked at the National Development and Reform Commission (NDRC).


The NDRC, China's top economic planning body, last week increased the price of gasoline by 10.6 percent, diesel by 12.3 percent and jet fuel by 10.3 percent.


The wholesale price of gasoline and diesel were separately raised by 500 yuan (US$62.5) per ton.


This is the biggest increase for gasoline since 2003 and aims to close the gap between domestic and international prices.


Niu Li, an economist with the State Information Center, said the price adjustment would have a very small impact on a country's CPI (consumer price index).


"Some sectors, such as transportation, are hurt most by oil price increases, but some others, like oil refining, are beneficiaries," Niu said.


"So there is balance of losses and gains across industries."


China's economy expanded by an annual average of 10 percent over the past three years and rose as much as 10.3 percent in the first quarter as investment in factories, real estate and other fixed-assets accelerated.


Oil majors in China have said higher oil prices may help cut losses in their refining and retail businesses.


Industry analysts predicted the country's oil refining business will become a "better prospect" this year.


The central government limits the retail price of oil products, such as gasoline and diesel, a pricing system that has caused the country's oil refiners to struggle in the red as global crude prices rise.


Since January 2003, China's benchmark prices for gasoline and diesel have risen by 56 percent and 50 percent respectively, but crude prices have doubled in that period, said Gordon Kwan, director of oil and gas research at the Hong Kong-based brokerage CLSA.


Following the price hike last week, China's top two oil companies, PetroChina and Sinopec, both said the move could cut their refining losses, and that it reflected the government's decision to move domestic prices closer to international ones.


"The 500-yuan (US$62.5) increase is big, and I can sense the government is showing a determination to change the pricing mechanism," PetroChina Vice-Chairman Jiang Jiemin was quoted by Bloomberg as saying.


Following the price increase, retail pump prices in China are about 27 percent lower than those in the United States, which are about US$2.9 per gallon on average.


PetroChina recorded a loss in refining and marketing of 19.8 billion yuan (US$2.5 billion) last year.


Sinopec had a 7.88 billion yuan (US$985 million) operating loss from refining in the first quarter.


The oil price increase obviously will hurt users, but will also encourage people to save energy and improve efficiency, experts said.


The Chinese Government earlier this year announced plans to subsidize economically vulnerable groups, such as the farmers and taxi drivers, to cushion them against the rising costs.


Beijing last week increased taxi fares by about 25 percent to pass on the oil prices increase to users.


"With oil prices on the rise, the higher costs will push consumers to choose energy-efficient products, which will help the country improve energy efficiency by 20 percent by 2010," Zhou said.


Li Jun, 32, a Beijing-based journalist said he had planned to buy a bigger car, but rising gasoline prices have led him to change his mind. He now wants a small-sized car.


Zhou said if global crude oil prices maintain their high level of about US$70 per barrel, there is room for the Chinese Government to raise domestic oil product prices even further.


Crude oil reached a record US$75.35 a barrel on the New York Mercantile Exchange last month, the highest since trading began in 1983.


Industry analysts have predicted global oil prices are unlikely to drop below US$50 per barrel in the near future.


The International Energy Agency, a Paris-based advisor of 26 oil-consuming nations, forecasts China's oil demand this year will rise by 5.3 percent to 6.94 million barrels a day.


(China Daily May 31, 2006)


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