By Zhang Hong
Published: 2008-04-01

Diesel shortages are striking across China from southern Guangdong to the northern Tianjian. Long queues of trucks and cars stretching over one kilometer long have appeared at some gas stations; and at one point, diesel was rationed to 300 yuan (US$42.58) for cash sales - enough for a family car but too small a portion for a truck tank.

The rationing comes as rumors spread that oil giant Sinopec and PetroChina were applying for government approval to increase fuel prices. To quell panic and public concern, the National Development and Reform Commission posted a statement on its website saying price hikes would be unlikely in the short run.

According to the senior management of Sinopec and PetroChina, the diesel supply remained stable in the domestic market and the reserves were at a reasonable level to prevent the recurrence of shortages during the severe snowstorm earlier this year.

Official statistics revealed that China's oil production rose 10.5% year on year in the first two months of 2008, and reserves up 28% compared with year-end; while the diesel stocks increased 46%.

In the meantime, the export of oil products has increased at a faster pace than imports, especially in southern China. Last year, the import of oil products in Guangdong declined 18% while exports increased 47%.

All signs point towards sufficient supply. However, as the Chinese government adopts price intervention on oil products, state-owned Sinopec and PetroChina are obliged to refine, produce and sell oil products at fixed charges despite the surging global oil prices, consequently the two companies claimed to have suffered billions of yuan in losses.

Last year, the two companies curbed runs and cut supplies to the market, creating shortages across China that forced the government to increase state-set fuel prices. Now, the companies seem to be deploying the same tactic again to exert pressure on the government. Though the two have denied such action, surging exports indicate their willingness to sell products abroad rather than at home.

However, the government hesitates to approve increment for fuel prices, as domestic inflationary pressure has reached an unprecedented level. The government fears a spike in fuel prices will lead to another round of price surges across sections. In February, the domestic consumer price index (CPI) rose to 8.7%, partly due to the snow storm impact. Experts are pessimistic about the inflationary outlook, warning this year's CPI could go higher than 4.8%, the goal set by the government.

Given a blockage over price hikes, the oil companies are turning to other alternatives, pleading the government to waive import tariffs and resources taxes, and to delay the payment of the windfall tax. The windfall tax kicks in after a firm has sold oil above 40 dollars a barrel. The graduated tax starts at 20%, but rises with prices to a maximum 40% on 60 dollars a barrel or more. With the current oil price level, Sinopec and PetroChina have to pay around 400 million yuan and 900 million yuan of windfall tax respectively.

Experts believe a delay in the windfall tax payment will eventually turn into a lift, and this will help the oil companies to boost their bottom lines. Latest news suggested that a consensus might have been reached between the government and oil companies.

In addition, the global wholesale prices for diesel started to drop since last week, and industry insiders said oil companies would import two million tons of diesels in the second quarter. This will hopefully smooth the supply shortage in the domestic market.