China Examines Its Oil Pricing Strategy

Focus: GLOBAL

Jim Trippon Image Jim Trippon Editor-in-Chief, China Stock Digest

In a boon to refiners, Chinese gas prices rise short-term as the government looks for better ways to work with Chinese oil companies and domestic consumers, reports Jim Trippon of China Stock Digest.

China last week raised fuel prices for the second time in a month last week, with a 6% hike in gasoline and a 6.5% hike in diesel fuel.

Retail gasoline prices at the pump were expected to rise to roughly the equivalent of $4.40 to $4.55 per gallon. The move was immediately seen as a boost to oil companies, which have experienced refining losses this year.

China Petroleum & Chemical (SNP), or Sinopec—whose major business is refining—booked a $3 billion loss in its refining segment for the first half of this year. The same period the previous year saw a loss of about $2 billion.

Although Sinopec and other major oil companies in China—such as PetroChina (PTR), which posted nearly a $5 billion refining loss—have remained overall profitable, the government’s fuel-price controls have inhibited the companies’ abilities to pass along input costs to end users.

The latest price increase would move fuel prices near their all-time high, which was reached in the early spring of this year. China’s government had been keeping the price down as a way of avoiding pressuring consumers economically, as fuel and food costs are a major part of consumer expenses. Beginning in late spring, the government cut fuel prices, and did so two more times by July.

Demand recently, however, has reached an almost two-year low, led downward by lower industrial demand due to the slowing economy.