The Pearl River Delta seems to be a comfy birthplace for oil crunches. Since last weekend, the "No Diesel Now" signs have once again been hung out in front of gas stations in the Baiyun, Haizhu and Panyu districts of Guangzhou City. Other stations which still have supplies are crowded with all types of vehicles. Some stations say that they can now only sell to companies that have a long-term supply contract with them. The rest of China is wondering whether it’s all going to spread.
Interestingly, according to oil stock and production statistics from C1 Energy, an independent petroleum information provider, in March diesel stocks in China’s coastal areas reached their highest levels in recent years. In the past two months, China’s oil production increased by 10.5% over the same period last year. Oil stocks grew by 28% over the beginning of this year, with diesel fuel making up 46% of the total. Market analysts speculate that this shortage is being caused at least partly by suppliers who are unwilling to part from their diesel stocks at government-set prices.
The Chinese government compensates Sinopec and PetroChina, China’s two state-owned petroleum companies, by fiscal and taxation policies for any losses they incur in their domestic sales. The Ministry of Finance will also refund value-added tax levied on some of their imported oil products. The two companies have both applied to postpone paying a special windfall levy and cut the import tariff on oil products by 75%.
Whether the government will approve these applications is not certain. The government grants subsidies to guarantee stable domestic supply, and not as a reward. But it is expected that the two companies�refineries are to continue to maintain a high level of oil production during the second quarter, and production will remain close to the first quarter’s.
The second quarter is usually oil refinery time for repair and maintenance. Taking the local yield reduction into account, C1 Energy estimates that domestic gasoline and diesel output will drop by 2%. Given the 2007 growth of 7% in diesel consumption and 6% in gasoline consumption, the two companies�imports, totaling about 2 million to 2.5 million tons, may meet basic demand but will far from provide a sufficient buffer.
Market analysts estimate that without more supportive policies oil shortages will still occur in some areas. If international oil prices hit new highs and speculative demand again explodes, shortages may recur, this time nationwide. To guarantee domestic supply, it is estimated China needs to import at least 4.8 million tons of oil, which is unlikely, and diesel supply will remain tight in the second quarter. The demand-supply gap is about 630,000 to 1,130,000 tons, so China needs to increase its supply through imports or other channels.
In the first quarter, 2008, China’s net oil product imports reached 5.47 million tons, an increase of 31.8% over the same period last year. But the continuous hike in international prices in combination with domestic price controls means domestic oil prices are much lower than the international price, leading to serious losses for PetroChina and Sinopec. On April 19, Sinopec predicted a fall in first quarter performance, saying that, even with the government’s subsidy of 7.4 billion yuan, profits would still slump by more than 50% over the same period last year.
Chinese refineries suffered first quarter losses of 23.924 billion yuan, marking a record high. The retail price for diesel is now nearly 6000 yuan per ton, while the wholesale price stands at 6500 yuan. China Petroleum and the Chemical Industry Association have said that although the problem is not new, it is growing wider and deeper, as it both leads to huge losses in the refining industry which discourages development of new refineries, and will also result in long-term supply and demand imbalances.
Subsidies can, in the short term, encourage the two companies to increase oil imports and relieve the tight oil supply, but to solve the problem at the root, the government needs to reform the oil products pricing mechanism. Now the government is granting subsidies to the oil industry on a monthly basis, which is better than the former annual subsidy. The policy helps the two state-owned petroleum companies increase production, reduce their losses and relieve the oil shortage, especially the diesel shortage in the domestic market.
However, private refineries, which account for 1/3 of China’s total capacity, do not enjoy government subsidies, leading to low utilization among these plants, thus definitely affecting the oil product supply in the market.
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