Fuel Shortages Across S. China As Oil Companies Square Off With Central Gvn. Over Subsidies

[hatrack]

DONGGUAN, China, Sept 28 (Reuters) - "Meiyou, meiyou" -- "None here, none here!" the petrol station attendant shouts, waving his arms at a small truck pulling up to the diesel pump to signal that it is dry. Without stopping, the truck rolls on in search of the fuel elsewhere -- another casualty of the low-profile but intense battle between China's government and its increasingly independent oil firms over who should fund fuel subsidies.

The showdown has caused diesel shortages in parts of China's booming coastal province of Guangdong for weeks, according to drivers, gas station managers and industry sources, as refiners seek to staunch losses by reducing sales. The dry pumps are a distant echo of the fuel criss in the summer of 2005 that sparked long lines and a government crackdown on oil firms' huge exports. Beijing suspended tax incentives and set export quotas to keep more fuel at home.

"There is definitely a shortage going on," said a manager at a state-owned petrol station in Dalang township, who requested anonymity. "But on the whole, it's much better than in 2005."

The dry pumps are a tangible reminder of the price distortion that makes top refiner Sinopec's (SNP.N: Quote, Profile, Research)(0386.HK: Quote, Profile, Research) earnings unpredictable, and can distort fuel demand in the world's second-biggest oil consumer. Despite repeated promises to gradually allow fuel prices to catch up with global rates, Beijing maintains a tight grip on rates, fearful that costlier energy could spark inflation or unrest. Gasoline prices have not been increased since May 2006.

EDIT

http://uk.reuters.com/article/oilRpt/idUKHKG22863720070928

[razzleberry]

1. simple solution to this ... charge world price .n/t.

[happyslug]

2. and risk revolution????

China is in a difficult position. Its main source of growth has been exports from its coastal Cities to the US. The Rural areas have been in a Depression for over ten years and for that reason barely holding on (This keeps food stable in China, but at the cost of low income for the peasants). The Chinese Revolution started with the Chinese Peasants, and many of the problems the peasants had in the 1930s and 1940s have re-appeared. These problems lead to the Revolution of 1949.

Now, China today is more urban then in was in 1949. The Communist leadership are more bureaucratic leaders (Tied in with the new Companies in urban China) compared to the party that won the Revolution in 1949.

This is mad more complicated by the slow deaths of the state owned businesses, which use to provide a lot of the heath care and other services that we in the West assume Government does (Steady employment, stable income, Police, fire and even housing). These Government companies still provide these Services, while the new privately owned companies do NOT (And often benefit from these services). The Government want to end these Government owned businesses, but dares not.

My point is China is in a bad economic situation. It holds a lot of US bonds based on its huge surplus with the US, but if the US economy tanks those bonds lose their value (Which is why I believe the Chinese are decreasing oil exports, to convert these bonds to oil and to hold the imported oil in a strategic reserve, which they announced they were adopting a few years ago).

Thus the Chinese leadership is in a box. The leadership can NOT afford to end the Surplus with the US, China would lose a lot of the value of the US bonds if that happens (And the US economy tanks). It can NOT afford a rural upraising for it would smack of a Chinese Peasant revolts, which often fails, but are also how most Dynasty (and the Nationalist) lost control over China. Another increase cost, over the efforts to keep food prices LOW, may be to much for the Chinese Peasants who may break out in a revolt. Even if the Revolt is suppressed (Which is the most likely outcome) the COST to suppress it would mean less money for other things, like the army itself.

If the price of Fuel would go to the world market price, imports of food from the countryside will go up increasing problems for the urban poor who may revolt and chase away foreign investors. Furthermore efforts to keep the food price down would also include making sure the Chinese peasants can NOT increase what they are getting for that food (And this keeps the peasants from getting increase money for their crops).

This is further Complicated by the fact the middle class are the primacy users of gasoline and diesel fuel, and this is the leadership of the Country (i.e. the leadership likes the fact they are NOT paying world price for fuel).

Thus, while the best solution would be to increase the price of fuel to the World Market Price, this is something the leaders of China fear (do to the fear of what the Peasants and Workers would do AND efforts to keep their costs for operating their cars low. Iran has similar problems as does Venezuela (Both countries suffer from the fact they keep domestic oil prices low). Everyone remembers Indonesia, when the price of oil dropped and them jumped back up, the Dictator of Indonesia was overthrown. One of the Reason Chavez won Venezuela is he is keeping the price of oil down (and one of the reason he won all of his elections is that the upper middle class of Venezuela do NOT want to share the oil wealth with the peasants and poor people of Venezuela which is why he keeps wining elections).

Something has to give. It may take the US tanking to do so (Through China or some other third world country may economically crack first). It looks like the US is the one who is going to tank, but China will fall with it. How far is a different question, but the situation will be radically different in Five years time.

[amandabeech]

3. Thank you for taking the time to write this.

How do you see the dollar peg to the yuan affecting the situation?

Do you think that the Chinese will have to revalue more quickly than they would like to pay for oil imports and imports of other raw materials?

[happyslug]

4. I am NOT an expert on China, I have just read a lot about Today's China

As to revaluing the Yuan. China likes thing s like they are at present unfortunately that is NOT sustainable (See Krugman's comments about what he expects to be a Rapid plunge of the US Dollar:
http://krugman.blogs.nytimes.com/2007/09/20/is-this-the-wile-e-coyote-moment/

Thus the big issue for China is HOW FAST to let the Yuan increase in value compared to the US Dollar. A slow change would give China manufacturers an opportunity to adjust to the lower profits that will result as the Dollar declines in relations to the Yuan. If it is fast, China manufactures may find themselves simply cut off from the US market to their costs being to high i.e. one day, the Yuan -Dollar exchange rate is what it is at present, the next day the Yuan to Dollar is 10 times what it was the day before. The price stays the same in Dollar terms, but in Yuan terms that is 1/10 of what it had been. Can these manufactures compete at the new price? I doubt it, which will forces massive bankruptcies in China and a rough economic times for China's working class.

A further factor is, at present, Oil is priced in Dollars. China has plenty of Dollars, but if OPEC says we what paid in Euros, those Dollars become worthless to buy oil with. China may then just dump them on the world market and with that move kill any chance of Bush being able to continue the war in Iraq do to lack of funds (i.e. the US will NOT be able to sell any new bonds, for the OLD US bonds would set the price for the new bonds and that will be Zero or close to it).

Buck to the Yuan, if Krugman is Right and the US Dollar will undergo a rapid plunge in value, OPEC will drop the Dollar as a currency (making the fall of the Dollar even more drastic) replacing it with the Yen, The Euro or maybe even the Yuan (Through most OPEC trade is with Europe so the smart money is on the Euro). China is a NET importer of oil, and if the yuan stays tied in with the Dollar, the Yuan will fall with the Dollar, making Oil more expensive to China. Breaking the yuan from the Dollar will minimize this problem.

Thus what I foresee is a Rapid decline in the Dollar, followed by a OPEC dropping the Dollar and then China letting the Yuan float in relations to the Dollar. I do NOT know when this will start (Neither does Krugman) but once it starts it will feed on itself till it is finish. I.e. the Dollar drops, OPEC drops the Dollar, the Dollar drops again, China frees the Yuan from the Dollar, the Dollar drops again. The Dollar is bottom out, but where? no one knows.