Rising Fuel Costs in China

Robert Hsu, June 24, 2008

Big news out of China recently: The Chinese government announced that it is raising fuel prices -- gasoline, diesel fuel, aviation kerosene and electricity -- in the country.

This may not seem out-of-the-ordinary since we have been dealing with higher oil prices for months -- oil prices per barrel are sitting above $130 and the national average at the pump around $4.09 here in the U.S. But what you may not know is that Chinese consumers have only been paying $2.80 per gallon because the Chinese government set the low fixed-price for gasoline.

In fact, fixing gasoline prices is a common occurrence in developing countries to subsidize the economy. Take Mexico, for instance. Gasoline prices are still under $3 a gallon in Mexico, and that's why many drivers from San Diego cross the border to fill up their tank.

Well, after a huge surge in crude oil prices this year, many emerging countries with state subsidized gasoline prices were forced to lift prices. And since other Asian countries such as India, Taiwan, Indonesia and Malaysia had already increased gasoline prices, I wasn't surprised to see China follow the same path.

As of last week, gasoline and diesel prices were lifted 16% and 18%, respectively, in China. This increase in fuel prices will alleviate the gasoline and diesel fuel shortage problem that is developing in China. So money-losing oil refiners will now have more incentive to produce gasoline again.

Continued on next page.

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