China sees fuel shortages, warns against hoarding

AP News
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Posted: Oct 27, 2011 7:11 AM
China sees fuel shortages, warns against hoarding

China's chronic fuel shortages are worsening with the onset of winter, as output lags behind surging demand following price cuts that are worsening refiners' losses.

The shortfalls are worst in eastern and central China, where some filling stations have run out of diesel fuel and authorities are warning against hoarding.

A surge in demand due to the end-of-year rush of construction projects and factory deliveries, the autumn harvest and transport of coal suppliers for winter heating has been worsened by hoarding following a recent cut in the government's wholesale price for fuel products, analysts and government reports said Thursday.

"Some companies expect supplies to be tight and they are storing the oil to boost profits because they know demand will be stronger in this season," said Lin Boqiang, an energy professor at Xiamen University.

In a notice on its website Thursday, the government in Hunan province called on local authorities to prevent illegal sales and hoarding of fuel to ensure "orderly supplies."

"Short supplies persist and the number of filling stations that have suspended sales has increased," the notice said. The last three months of the year account for nearly a third of annual fuel demand, according to the Hunan government.

The persistent shortages reflect the limitations of China's system of centralized control of fuel prices. Because individual producers don't set their own prices, many often cut production to limit losses when domestic fuel prices are lower than what they must pay for imported oil.

In 2009, the government began changing domestic refined oil prices to reflect trends in international prices. In its first price cut in over a year, earlier this month the government announced a reduction in wholesale prices for diesel and gasoline, by 300 yuan ($47) per ton.

The shift was expected to aid the government's effort to cool inflation. But since then, prices for crude oil have rebounded, to above $92 a barrel Thursday from about $75 two weeks earlier.

Refiners are now under pressure to raise output at a time when rising costs are once again forcing them to produce at a loss.

China faces similar side effects from its controls on coal and power prices, which in turn can aggravate fuel shortages when manufacturers turn to diesel generators to make up for power outages, said Lin.

Apart from goading refiners into raising output, "The government needs to guarantee enough power in the winter ... to push power plants to work hard and produce enough electricity," he said.

State-owned Sinopec, Asia's largest refiner by capacity, announced earlier this week that it has been operating at full capacity trying to keep up with demand and planned to raise its output by 2.8 percent in November, processing 18.3 million tons of crude oil.

It said it was adjusting its production mix and postponing planned maintenance in some refineries to ensure higher capacity for diesel production.

Sinopec says it sells an average 413,000 tons of refined fuel a day, with a record high 284,000 tons going to its own filling stations and the rest going to other operators, who reportedly have been complaining they are unable to get supplies.

"We do sell to the other gas stations," Huang Wensheng, a Sinopec spokesman, said Thursday.

But China's independent refiners have more leeway to cut production when prices fall and are holding back, waiting for fuel prices to be adjusted upward again.

"Some private oil companies are not so willing to produce since imported crude oil is getting expensive, so they are just using 40 percent of their capacity," said Han Xiaoping, chief information officer of the energy website China5e.com.

"It's just because some companies expect to make more money when prices are raised again soon, so they are hoarding oil," said Han.

"The supply shortage will be solved when the next adjustment, which I expect within about a half a month," he said. "Once the price is raised, the problem will be solved."

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Associated Press researcher Fu Ting contributed.