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[johngeorge]

http://biz.yahoo.com...runch.html?.v=2

Saturday November 3, 2:06 am ET
By Joe Mcdonald, AP Business Writer
China Struggles With Fuel Crunch, but Experts See No Change in Price Controls BEIJING (AP) -- Bus drivers in the bustling southern province of Guangdong have a new daily chore: Hunting for diesel. Amid widespread shortages, service stations allow drivers just a few quarts at a time, forcing buses to stop repeatedly to fill up while passengers fume, said Dai Guowei, an employee of the Zhaoshang Passenger Transport Co."After using up the diesel from the last filling station, we have to rush to another station," Dai said Friday. "Usually we have to wait at least a half-hour to fill up. So we get a lot of customer complaints."

Companies across China are hurting amid diesel shortages blamed on price controls that force oil refiners to lose money on each barrel they process. That's prompted them to cut back on production.

The government raised prices Thursday by nearly 10 percent to curb demand and encourage refiners to produce more. But it gave no sign it will change what analysts say is the root of the problem: an antiquated system of state-set prices that encourages waste and distorts business decisions by oil suppliers.

"I don't think this is the start of a new trend. I think it's just a small adjustment," said Steven Knell, an oil industry analyst in London for consulting firm Global Insight.

China's problem is self-inflicted. After three decades of economic reforms, Beijing still sets one-third of prices, including the price of electric power, gasoline and cooking oil. But that clashes with the free-market reality of China's oil refiners, which must pay record-high prices for crude on the world market.

The fuel shortages have hit trucking companies hard, disrupting their service and delaying deliveries.

This week's fuel price hike was the first granted by regulators in 18 months. They had rejected refiners' appeals to be allowed to pass on high crude costs to consumers, citing a need to protect China's poor, who have seen a sharp rise in food prices, particularly pork, the country's staple meat.

"There's a political element of having to be seen to be responsive to public concern while at the same time trying to allow market forces to operate more freely," said Gavin Thompson, an industry consultant in Beijing for the Scottish firm Wood Mackenzie. "But it's a very tight balancing act they are currently in."

Economists have long argued that China should scrap controls and let the market set gasoline and diesel prices.

Low prices undercut government efforts to clean up China's polluted environment, improve economic efficiency and reduce what communist leaders see as a risky reliance on foreign suppliers.

China is the world's second-biggest oil consumer after the United States. The government says oil imports climbed by 18.1 percent in the first eight months of this year, propelled by an economy that is on track for a fifth straight year of growth above 10 percent.

China's industries use 3.4 times as much energy per unit of economic output as the world average, according to the government.

Rising sales of gas-guzzling cars have left China's cities choked with smog.

But such concerns are trumped by the ruling party's desire to maintain strong economic growth.

"The strategy that is framing pricing policy is grounded in the economy and the imperative that rates of growth that we have seen over the past few years persist. Low-cost fuel has played a role in the boom," said Knell.

"I don't believe the state authorities are willing to sacrifice that for the environment," he said.

Economists say the impact of the fuel shortages on China's trade-dependent economy is unclear, and will depend on how long they persist.

Customers and some Chinese media accused oil producers this week of creating a phony crisis to force Beijing to raise prices.

China's No. 2 oil company and biggest refiner, China Petroleum & Chemical Corp., known as Sinopec, defended its efforts to meet demand and promised to import fuel in November.

It was unclear whether Thursday's price hike would be big enough to restore refiners to profitability or pay for them to invest in new processing capacity.

China faced a similar pinch last year and Beijing prodded Sinopec and the country's biggest oil producer, China National Petroleum Corp., to supply more fuel, rewarding them with a tax rebate.

Employees contacted Friday at filling stations in Guangzhou, in country's southern business capital, said they had little or no diesel. Most said trucks and buses were limited to buying about five gallons.

"There is no diesel," said an employee who answered the phone at a Sinopec station in Guangzhou and refused to give her name. "I don't know when we will have it."