The Game-Playing Behind China’s Fuel Crisis

In the past several months, fuel scarcity has once again swept over much of China: drivers queuing for hours outside filling stations only to get a few liters of rationed fuel, or simply being turned away by dry nozzles. Such scenes have become increasingly common in recent years as the country suffers from periodic fuel shortages during peak demand seasons. A real headache to drivers, this phenomenon has generated a special term—“You Huang,” or “fuel panic”—except that it now has lost any element of surprise.

Contrary to the hasty conclusion that China is running out of fuel, hard figures reveal that this phenomenon is more likely rigged by the country’s oil monopolies in an effort to push up the price cap in the domestic market. According to Chinese customs authorities, for the first nine months of 2007, China’s exports of refined oil reached 12 million tons, a 31 percent increase over the same period last year. This October, when some cities experienced the worst fuel crisis, China imported 30,000 tons of gasoline, while exporting six times that much to the international market.

The rampant export of refined oil at a time of nationwide fuel shortages harkens back to the first half of 2005, when China’s prosperous Guangdong Province was hit by a serious fuel crisis for more than two months. China’s crude oil exports rose by 27 percent for the first three-quarters that year, while refined oil exports were up 38 percent over the same period.

It is not the shortage of oil, but rather the low price of fuel on the domestic market (which has fallen below the global price due to government controls), that has dampened the enthusiasm of refiners. Diesel costs about US$.64 cents a liter at the pump in Beijing, compared to around $1 a liter in Singapore and $2 a liter in Britain. The recent international oil price hikes appear to have further eaten away at refiners’ profits, and oil firms are claiming huge losses in their refining businesses.

This is exactly the argument that China’s oil giants are using to demand an increase in the domestic fuel price, which has remained unchanged for 17 months. Their complaints, however, are dubious. Oil giants in China are state-owned enterprises and thus protected from outside competition. Since March 1998, the Chinese government has merged all segments of the domestic oil industry and created two major state-owned monopolies, PetroChina, and Sinopec. The government has granted PetroChina the rights for oil exploration and refining in 12 provinces in the north, while Sinopec oversees the remaining 19 provinces in the south. The companies also hold the rights for oil export and import.

These two oil giants have gradually consolidated smaller companies and created monopolies over their respective turfs, wiping out outside refineries and throttling private filling stations. They have garnered windfall profits in their exploration businesses at a time when world oil prices are soaring. This May, PetroChina announced the discovery of a billion-ton crude oil and gas reserve in Northeast China, the biggest such discovery in more than three decades. Sinopec also discovered a 140–200 million-ton crude oil reserve in the Northwest, and the company’s proven natural gas reserves jumped from 36 billion cubic meters at the end of 2006 to 80 billion cubic meters this year.

Statistics show that China’s petrochemical firms have seen their profits increase continuously by large margins since 2003, when the term “You Huang” first entered the popular vocabulary. The industry’s profits registered a 43.6 percent year-on-year increase in 2003, and an 18.3 percent increase in 2006. Higher oil prices mean higher profits. PetroChina has remained the most profitable company in Hong Kong’s capital market for years, and Sinopec leads the top 500 enterprises in China.

It is fair to point out that the refinery segments of these companies are lackluster. But what is hidden from outsiders is the fact that the refineries get much of their crude oil from domestic exploration of high-quality oil fields, at costs of no more than 50 RMB (roughly US$6.5) per barrel. Their claimed “losses” have been calculated by using global oil prices of $100 per barrel as a benchmark.

Since July, Chinese refiners from the north to the south have stopped their operations for “equipment overhauls,” some of which have lasted for three months. Overhauls normally take place during the standard off-peak seasons of March and April. But this year’s maintenance activities occurred right at the beginning of the busy season, an abnormal gesture that is widely perceived to be an unyielding nudge to the government to raise domestic fuel prices.

The government has already acquiesced in this game. Policymakers adjusted the gasoline price five times in 2005. This November, the wholesale price cap on gasoline, diesel, and jet fuel was again increased by roughly 10 percent. But apparently, the oil giants are far from satisfied. Fuel shortages have continued even after the new prices went into effect.

The Chinese government, sympathetic to the oil firms, certainly cannot afford to give in totally. It is not at all prepared for a sudden liberalization of the market, fearing that a sudden rise in prices will spark inflation. But it cannot afford to do nothing about the rigged shortages either. China’s fuel crisis has already created considerable social instability. During the latest round of rationing, a man was killed in a brawl when he tried to jump the queue at a gas station in Henan. In 2005, when prosperous Guangdong Province in the south was hit seriously by fuel shortages, several thousand public security officers and paramilitary police had to be stationed at filling stations to appease grumpy drivers.

In the face of heavy pressure from the nation’s oil giants, China’s government is struggling to regain some footing. This has resulted in a series of mandates to the industry, which would appear starkly ridiculous to any observer with a free-market background. During this year’s pervasive “equipment overhauls” by refiners, the government ordered the industry to “rationally arrange its overhaul time.” And at the initial stages of the recent fuel shortage, the government mandated PetroChina and Sinopec to strictly control their exports. But only the latest measure has cut to the bone of the problem: according to Shanghai Securities News, the government plans to force PetroChina and Sinopec to cooperate with private refiners, feeding those long-starved small players with a certain amount of crude oil.