China, India to cut fuel price for first time in two years
By Himangshu Watts and Tom MilesDecember 6, 2008
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A worker fills a car with fuel at a petrol station in Jammu, India, Dec. 5, 2008.
Photograph by : Amit Gupta
NEW DELHI/BEIJING - China and India on Friday moved to cut domestic prices for the first time in nearly two years, curtailing refinery profits to help stimulate growth in their flagging economies and to contain popular discontent.
Asia's powerhouse economies, both of which have subsidised cheap fuel in recent years to protect their poorer industries and drivers, initially resisted a knee-jerk reaction to tumbling oil prices, fearing a quick rebound in crude.
But with oil now less than $45 a barrel - more than $100 off its peak in July - India says it will cut gasoline prices by 10 percent cut and diesel rates by nearly 6 percent at midnight. That move is likely to be followed this weekend by lowered short-term interest rates as New Delhi steps up its efforts to stimulate the economy.
Beijing also on Friday announced a long-awaited overhaul of its domestic fuel-pricing regime, introducing much higher taxes at the pump and a guaranteed margin for refiners, measures almost certain to be accompanied by a drop in domestic prices, which have been unchanged since a shock 18 percent hike in June.
The new measures are due to take effect Jan. 1.
Consumer nations are growing more confident that oil may stay cheap and are seeking new ways to defend against the spreading global recession.
Even Indonesia, which has already trimmed gasoline prices once, despite having the cheapest fuel in any major Asian economy thanks to hefty subsidies, suggested it may make more cuts.
"We are carefully calculating the chance to lower the price of gasoline again and diesel fuel if possible so people and industries are less burdened," President Susilo Bambang Yudhoyono said.
The cuts in India and China come long after after Vietnam, Malaysia and Pakistan slashed their domestic prices. They will further dampen inflation that's already on the wane, and could turn to political advantage.
India, whose government is under pressure over the terrorist attacks in Mumbai last week, faces a series of state elections in the coming weeks and a national vote next year.
In China, small local protests had grown as drivers, particularly taxi operators, complained that U.S. gasoline prices were one-third cheaper.
For a graphic on U.S. versus Chinese prices as of Nov. 25: https://customers.reuters.com/d/graphics/CN-GSPRC1108.gif
OIL DEMAND UNREVIVED
Analysts said the lower prices were unlikely to provide much lift for fuel demand, especially in China, where the expected dip in pump prices will be tempered as new taxes come into place.
"Chinese demand is taking a big hit with the global economic downturn and this will not change that," said Jeff Brown, managing director for consultancy FACTS Global Energy.
The surge in China's oil demand has made it the world's second-largest consumer.
While the country still uses only about one-third as much oil as the United States, its continued growth has helped offset shrinking consumption in the developed world.
But signs of a significant slowdown have mounted, from the unrelenting rise in domestic stocks to refinery production cuts to a third monthly fall in car sales in November.
Beijing did not say when or by how much it would reduce fuel prices. It said from Jan. 1 it would allow gasoline and diesel prices to move more regularly in line with the global market, but would retain the right to put a cap on rates.
The consumption tax on gasoline will rise to 1.0 yuan per litre from 0.2 yuan per litre and tax on diesel will rise to 0.8 yuan per litre from 0.1 yuan per litre, said the National Development and Reform Commission, China's top economic planning body.
"Retail fuel prices still have room to fall after the hikes in consumption taxes," said Lawrence Lau, Bank of China International in Hong Kong. "But the hikes won't have any impact for the listed oil firms."
REFINERS LOSE OUT
The measures in the two countries mean that several months of outsized profits thanks to cheap crude and steady fuel prices will be curtailed, although refiners like Indian Oil Corp will still be subject to the whims of the government while Chinese peers Sinopec and PetroChina will get a guaranteed margin.
Announcing details similar to those Reuters reported last week, Beijing said it would price domestic retail fuel at 4 percent above refinery-gate prices plus transportation, ending years of refiners being forced to bear the cost of selling cheaper subsidised fuel at a loss as crude prices surged.
Crude oil, which soared to a record above $147 a barrel in July, fell on Friday to below $44, its lowest level in nearly four years, making the prices cuts and reforms an easy enough move.
The real test will come if crude begins to rally again.
"My caveat to that is that (China's) new pricing structure hasn't been tested when oil is up towards $150 a barrel. So it sounds like the government has the ability to short circuit the pricing system if oil prices rise too high too fast," said Ben Simpfendorfer, China economist at RBS.
