China to Raise Oil and Electricity Prices

China urged by Chinese oil producers to loosen price controls.

China will raise oil and diesel prices on Friday, the official Xinhua news agency reported, quoting the country's top economic planner.

Oil and diesel prices would go up by 1,000 yuan (US$145) per tonne while aviation kerosene would increase by 1,500 yuan ($218) a tonne, the National Development and Reform Commission announced today, according to Xinhua.

The average electricity price would be raised by 2.5 cents per kilowatt hour from July 1, but urban and rural residents and the farming and fertilizer production sectors would be exempt, it said.

The Chinese government, which has made taming inflation its top economic priority, imposes strict controls on energy prices due to fears that higher fuel or power costs could fan inflation already near 12-year highs. But the centralized pricing system and rising international crude costs have left domestic oil majors such as Sinopec saddled with huge refining losses and led to mounting calls for the government to loosen its price controls.

The price of oil has overtaken $130 a barrel, and has even flirted with $140, with some analysts saying the possibility of hitting $200 a barrel is not far away. China accounts for around 40% of the growth in global oil consumption to fuel its rapidly expanding economy.

Investment bank China International Capital Corporation, or CICC, said a reform in the energy pricing system would benefit not only China but the whole world. "The international crude oil price largely depends on China's energy pricing policy because China accounts for around 40% of the increment of global oil consumption," it said in a research note.

CICC cited a detailed simulation which showed what would happen if China raised its oil product prices by 50% around mid-2008 to put the domestic refining gross profit margin in line with international levels. Under this scenario, international oil prices would decline to $110 per barrel by the end of 2008, and $90 one year later. By contrast, if China continued to control domestic oil product prices, international crude oil price would hit $200 per barrel, according to the simulation.

While seeking to reduce its oil subsidies, the government is likely to be wary about the effect of higher fuel prices on inflation and possible public discontent. China's consumer price index rose by 7.7% last month, easing only slightly from April's 8.5% and still hovering near 12-year highs.

Vice President Xi Jinping is due to attend a crucial international energy conference in Saudi Arabia this weekend in a bid to look for a solution to the challenges caused by soaring oil prices.

Copyright 2008 Agence France-Presse

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