Rising global crude oil prices on the one hand and the growing domestic inflationary pressure on the other have put the government in a difficult situation, making it extremely difficult for it to decide whether and when to raise gasoline and diesel prices.

Cao Changqing, pricing department director of the National Development and Reform Commission (NDRC), said skyrocketing global crude oil prices are putting pressure on China to adjust its domestic prices but the government hasn't done so yet mainly because of the fear of adding to inflationary pressures.

He said the government is considering subsidies for crude oil refiners to help them meet the growing demand.

While admitting "the dilemma" in deciding on a gasoline price hike this time, the official said the government is committed to letting "market decide gasoline prices" finally. "Our price reform is aimed at uniting the domestic and international prices of refined oil and diesel."

Cao said China needs to adjust its refined oil prices as international prices rose to an average of $72 a barrel last week. China's crude oil prices have already been linked to the global market but the government still regulates the gasoline and diesel prices.

"The prices of oil products really need adjusting low oil product prices are not conducive to energy saving," said Cao. But he added that the government faces another problem: raising oil product prices may accelerate the current round of inflation.

"So we are in a dilemma now," Cao said yesterday. He added that regulators need more time to assess the situation.

The NDRC has been under pressure to raise gasoline prices. The nation's two largest oil companies, China National Petroleum Corp and China Petroleum & Chemical Corp, recently joined a group of applicants to seek a price hike for refined oil products.

But Cao expressed fears that raising prices of oil products will increase the prices of other industrial products, fueling the present inflationary spiral. "That is not good for the health and stable development of China's economy."

Oil refiners in China say rising international crude oil prices have already squeezed their profits. The nation's largest oil refiner, Sinopec, which imports 70 percent of its crude oil, has reportedly seen a loss in its second-quarter refining figures because of high crude prices.

Cao said the government will subsidize the refiners but didn't reveal the details.

China has already started reforms to gradually deregulate refined oil prices. The reform has gathered momentum since last year, with prices being raised twice. But the momentum has slowed down this year even as global oil prices skyrocketed in March and June.

Electricity charges

Cao also said the government needs to further weigh the possibility of allowing price hikes for electricity, both for industrial and household purposes.

Pushed by growing coal prices, China's five major electricity generation groups, the mainstay of the country's power industry, are reported to have appealed to the central government for a further price increase.

According to Beijing Times, this is the third time this year that China's main power producers have jointly appealed to the NDRC for a price rise.

China's coal prices are already market-determined but the government still regulates prices of electricity, about 80 percent of which comes from coal. But coal prices have been pushed up by growing electricity demand in keeping with the blistering growth.

The five State-owned power groups' call for electricity price rise follows the government's demand for nationwide reduction in pollution and power consumptions.

Beijing Times said the reason the government has not given the green light to power producers to raise prices is the fear of further inflation.

(China Daily July 26 2007)