China to Increase Fuel Prices; Oil Falls

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.

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  1. Anonymous

    Like I said in your 6/13 Quelle Surprise! Imports Lowering Inflation… post, I’d rather take the $100 parka and the $2 gas than the $2 parka and $100 gas….

    But then I got this friend who says, “I’d rather have the $2 corn and the $100 gas than the $100 corn and $2 gas…”

  2. Anonymous

    “WSJ” says it’s an ~17-18% increase. I dread to see the CPI numbers for July! And conversely, say crude futures drop 18% as a result and developed market petrol prices follow suit. What will that do to developed market CPI?

  3. Anonymous

    I wonder if markets have read the implications of China’s new oil price policy properly. As I understand it, the ‘subsidy’ was in the form of forcing local oil companies to take a hit on profits. So, they naturally would respond by trying to economize on imports. If this is right, then lifting the price limits will increase total consumption in China and lead to higher world oil prices.
    We’ll see.

  4. mxq

    I’m as suprised as anybody about this…esp. after reading any number of posts from Brad Setser, that illuminate the trillions in reserves China has at its disposal.

    That makes me wonder if China is doing this more so to gain political good-will, rather than to relieve financial pressure?

    And switching gears a tad (looking at the supply side)…I’m about fed up with OPEC members quoting that “the oil markets are well-supplied (no pun inteded!)” and then giving zero details. Yes we know there are floating ships off the coast of Iran, but could you possibly elaborate on “well-supplied?” Maybe, a three page powerpoint presentation that backs this up – dummied down to a few charts and some graphs for us plebians?

    Maybe they just think its blatantly obvious?

    Obviously, the oil markets don’t think so.

  5. juan

    MXQ, could ‘well supplied’ mean that world production has increased moreless two million barrels/day over the last year while consumption has begun slowing? Memories of overproduction linger.

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