naked capitalism

China had said it would increase fuel prices, which are heavily subsidized, in a statement last month, but had not given any timetable for its actions. Most observers had assumed any change would take place after the Olympics.

In a surprise move, perhaps impelled by inflation concerns, the Chinese announced a price hike effective tomorrow. From Bloomberg:

Crude oil fell more than $1 a barrel on speculation demand will decline, after state-run Chinese television said the country will raise fuel prices.

China, the second-biggest fuel consumer after the U.S., will increase gasoline and diesel prices by 1,000 yuan ($145.50) a ton starting tomorrow, China Central Television said. Jet fuel and power prices will also increase. Oil has almost doubled in the past year partly because of rising Chinese demand.

“The announcement of the Chinese fuel price increase sent the market sharply lower,” said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York. “This should have a big impact on demand.”

Crude oil for July delivery fell $1.58, or 1.2 percent, to $135.10 a barrel at 10:34 a.m. on the New York Mercantile Exchange. Futures climbed to a record $139.89 on June 16. Prices are 94 percent higher than a year ago.

“The developing countries, in particular China, have been driving demand growth,” said Eric Wittenauer, an analyst at Wachovia Securities in St. Louis. “Subsidies and price caps insulate consumers from the full impact of higher prices. By rolling them back, some of the insulation is reduced and we can expect to see a demand response.”

Brent crude oil for August settlement declined $1.80, or 1.3 percent, to $134.64 a barrel on London’s ICE Futures Europe exchange. Prices climbed to a record $139.32 on June 16.