From Cover, issue no. 340, November 5th 2007
Translated by Zuo Maohong
Original article:[Chinese]
The 500-yuan rise in the retail price of oil products on November 1st hints that the oil shortage has passed, but it doesn't mean that firms like his are in the clear. Palpable financial losses still await them.
As far as Zhang recalls, this has been the fourth widespread oil shortage in the nation, and his company has rode the ups and downs throughout. But he has no idea when the next will come.
Multiple Burdens Under Oil Shortage
While oil cans crowd the factory yard, a desolate eight-lane road betrays a more dire business climate. In the past, tank trucks queued to purchase oil at the gate.
Wang, a local taxi driver, says, "It's been hard to get gas in Weifang City and Changyi county (both in Shandong). A scattering of stations with gas have limited sales to no more than 100 yuan per customer. Larger vehicles can never fill up."
In the past two months, the mayor of Weifang has paid three visits to Zhang's company, urging it to guarantee sufficient supply of oil products to the market.
"But the problem is, although the company is operating normally, gas stations are suffering losses - the more they sell, the more they suffer."
According to Zhang, the oil shortage this time arises not from a gross shortage, but price imbalance. Despite China's purchases of foreign oil according to market prices, retail prices are still tightly leashed.
The supply and demand chain has started to break apart as international and mandated local prices edge farther apart. Recently, oil on the international market has soared to 600 dollars per ton.
Founded in 1986, Changyi Petroleum & Chemical is the only high-output, top-grade fuel manufacturer in Weifang, and one of 15 refineries in the province after the government's clean-up of the industry.
According to government regulation, Sinopec is in charge of crude oil distribution to the local refineries, and oil product sales are only offered by the oil behemoth's wholesale partners instead of the refineries themselves.
Double-pressed by monopoly and shortages, the company, which used to be a small refinery with productivity of only about 1 million tons, was reformed by Chemical China in 2005.
"Despite that the company now is a state-owned enterprise, it suffers even more than private refineries when an oil shortage occurs,"says Zhang.
Some local refineries, sensing trouble, reduced or froze output before the shortage really took root. But as a state-owned enterprise, the company has to prop up oil supplies in surrounding cities. Meanwhile, it is still tormented by the monopoly of the industry as other private refineries are.
The company's present productivity is 3 million tons a year, far exceeding the 100,000 tons of crude oil previously planned to be supplied to it yearly. With such a gap, the company has resorted to importing fuel oil from Southeast Asia.
Fuel oil is the remnant of crude oil after the first round of refining.Refining oil product from fuel oil is not only technically challenging, energy-consuming, and expensive, but both quantity and quality of the output are disappointing.
Early in May, the company sensed financial disaster on the horizon. It narrowly escaped massive losses by transferring one third of its productivity to more profitable chemical products. Had it limited its production to refining, it would have lost up to 100 million yuan.But because most local refineries do not have petrochemical equipment, they do not have this option—they can only limit or stop refining.
A source with a refinery in Zibo, another city in Shangdong, calculates that at the current crude oil price of
80 dollars per barrel, the company loses 600 yuan per ton it refines, and 1,000 yuan per oil product it produces.
Meanwhile, diesel oil prices in Shangdong have only grown by 300 yuan per ton, and gas approximately 100 yuan. The source adds that management has been considering whether or not to stop production, since it will still be costly to do so—3 million yuan vanishes when medium or small-scale refining equipment restarts.
The Crisis Afterwards
No one can predict when the shortage will end. In the past two months, Changyi Petroleum & Chemical has dispatched more staff to purchase raw materials from major suppliers and domestic ports to beef up stockpiles should anything else go awry.
In October, the company obtained 100,000 tons of fuel oil from Singapore, which helped the company scrape through the predicament.But the high costs of recent purchases have not made things any easier.
"For our company, greater challenges come after the oil shortage rather than before it," Zhang says. During an oil shortage, refineries manage to limp along with low profits thanks to the overall insufficient market supply and stored supplies.
Afterwards, however, they meet with great losses, as demand and product oil price fall while the price of material purchased beforehand looms over them. By some counts, the company will lose 50 million yuan in November and December.
Experts say that the 500-yuan bump has been the most significant adjustment by the National Development and Reform Council todate. But it only amounts to an increase of 10 percent in crude oil price, still lagging behind the 25 percent in international crude oil prices that precipitated them.
Pressured by the oil shortage, more and more local refineries in Shangdong are calling for an end to the monopoly in the industry and a mechanism for fair competition so that they have access to independent crude oil purchasing and oil product sales.
The National Development and Reform Committee will have a third discussion with these refineries in November, which would punctuate negotiations that have occurred these past two months.
As a principal of one refinery says, unless the monopoly is broken and the retail price stays above costs, there will definitely be another round of oil shortages, and no refinery can promise to hold on when it comes.
