Energy Bombshell: China Raises Oil and Diesel Prices

On Thursday, China dropped a bombshell with the news that it was raising prices on refined products, gasoline and diesel. Detailed reports are confusing, not the least due to the currency and weight units used. The best I could find is gasoline from 5980 to 6980 yuan/ton, diesel from 5520 to 6520 yuan/ton, and jet fuel from 5950 to 7420 yuan/ton. However, those appear to be the wholesale price. The new retail prices are reported to be 7540 and 7040 Yuan/ton for gasoline and diesel, respectively, and represent an increase of 0.8 and 0.92 Yuan/liter.

According to this website, 1 metric ton of gasoline is 1356 liters or 357.8 U.S. gallons (1 gallon = 3.79 liters). Therefore, at the exchange rate of $1 = 6.9 yuan, the new retail price in China (5.56 yuan/liter) is equivalent to $3.05/gallon. While it's over a dollar cheaper than the prices in the U.S., it's reportedly an 18% increase. (As of last December, the price was equivalent to $2.65/gallon, but the Yuan has strengthened since then). The price increase was about 40% for diesel since the same price increase of 1000 yuan/ton is spread over a smaller number of liters (diesel is denser at about 1190 liters/ton).

Prior to this price increase, the Chinese refiners [such as China Petroleum & Chemical Corp. (SNP), and PetroChina Co. Ltd. (PTR)] took a loss on each liter of gasoline and diesel they sold. Although they receive a subsidy from the government, it has not kept up with the rising price of crude. As any rational, profit-maximizing business would do in this situation, they reduced output, resulting in lines at the pump. The New York Times had an excellent report on the situation. One thing to keep in mind is that while high prices in general attenuate demand, since Chinese refiners weren't at full capacity (and presumably now will be), it's not clear that crude demand would immediately be lowered.

I'm very heartened by this development on many levels. It was inevitable, although many thought China would delay it until after the Olympics. I'm glad that they took the pill early, and weren’t bogged down by an artificial deadline. In doing so, they did everyone a favor by removing a distortion in the energy markets. It was a triumph of free markets and a defeat of price controls everywhere. Capitalists everywhere should rejoice.

On a more personal level, I have been buying GuShan (GU) a Chinese biodiesel company that I mentioned in passing in the post on Darling International (DAR). GU is on pace to increase its production capacity to 400,000 tons in 2009 (corporate presentation). I have been averaging down (yeah, I know) lately as it dropped in anticipation of the lock-up period expiring. GU is now up over 16% on nearly four times average daily volume. It has been volatile, but I see it going much higher. For one, Chinese diesel prices are still below international levels. As stated in the New York Times article, the quality of Chinese diesel is appallingly low. On the other hand, GU's products are much cleaner and should be in demand when China raises its fuel standards as well. (See the corporate presentation. Biodiesel is inherently low sulphur.)

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Disclosure:  The author owns GU.

Comments

[pachanguero:]

LOL...bomb shell? Oil is back up today.

This is a long term trend.

2008 Jun 20 08:44 AM

[Marcus Aure...:]

Every analyst I read who claims we are in the middle of a speculative oil bubble in no way denies what the long term trend is.

It is a bombshell. There was the usual griping at $3.00 per gallon over here but GM kept all of its light/consumer truck plants cranking out Suburbans & Tahoes.

Now the Chinese consumer has to pay more realistic prices they will be more conscious of their gas consumption. Funny, how some people bemoan the fact we only pay $4.00/gallon or so for gas while in China they pay even less.

2008 Jun 20 12:08 PM

[Alphameister:]

Agree that every step the Chinese government makes in the direction of free markets is cause for cheer. Interesting, isn't it, that certain Democratic senators want the US to go in the opposite direction by taking over domestic oil refineries in a quixotic effort to force down gasoline prices.

GU does look interesting, though I'd like to see more evidence of basing before getting involved.

2008 Jun 21 12:18 PM

[jabez:]

Yeah, and aren't the Chinese/Cubans drilling the Eastern Gulf of Mexico right NOW... ?

2008 Jun 21 12:21 PM

[Kunst:]

"Funny, how some people bemoan the fact we only pay $4.00/gallon or so for gas while in China they pay even less."

What's our per capita GDP, ten times theirs?

2008 Jun 21 09:19 PM

[E.D. Hart:]

Oil demand from China will not decrease, but in fact will increase as the two big state oil companies buy more to increase what is now a profitable product.

Demand destruction in China will not occur at these levels as cars are still the purview of the rich and upper middle class. Here in the US, demand destruction is occurring at $4.00 per gallon, but lower US demand is a short term, and modest effect of higher prices.

Monday should see the spike of Oil as Nigeria takes 10% of its production off line, and Israel rattles sabers against Iran.

Don't count Israel out--they have struck Syria before, and are saying that a strike against Iran is "inevitable".

Look for $150 plus a barrel this summer and beyond. The Saudi's attempt at ramping up production is a sham--they simply don't have the spare capacity to increase in a meaningful rate anymore.

2008 Jun 21 10:04 PM

[James Lewis:]

I think we'll see 175USD/barrel, on that basis where do you think these government controlled 'public' companies will be trading.

2008 Jun 21 10:23 PM