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2008-07-28 | All chapters

China, India take different cues from oil's fall
Chen Aizhu and Nidhi Verma, Reuters, 25th July 2008

BEIJING/NEW DELHI, July 25 (Reuters) - Oil's over $20 fall in the past two weeks may provoke quite different reactions from Asia's two fastest-growing oil consumers, both blamed for aiding a six-year price rally with subsidised domestic fuel prices.

In New Delhi, where the coalition government eked through a confidence vote this week and is looking anxiously ahead to a May 2009 general election, officials are already looking for the next chance to cut prices, rolling back part of their 10 percent increase in June in order to contain near 13-year-high inflation.

But Beijing, resolute in its desire to eventually allow prices to match global rates in its bid to pursue greener economic growth and temper consumption, may see the fall to $125 a barrel as an opportunity to quicken progress towards market-based prices, easing losses for state refiners such as Sinopec Corp (0386.HK: Quote, Profile, Research).

Although few expect that to happen overnight, they say policymakers in China still regret missing the opening to link fuel prices to global rates in 2005, when they hesitated in hope that a retreat from $60 crude would make the move less painful.

They waited in vain, but now may have another chance.

"The sinking oil price gives Beijing a psychological advantage to bring domestic prices up to international levels, which is important to safeguard energy security and promote energy efficiency," said Joerg Wuttke, president of the European Chamber of Commerce in China and a long-time Beijing-based energy industry executive.

Only if oil were to fall to $80-$90 and remain there -- a break-even level for most Chinese refiners -- do analysts think Beijing would again consider cutting prices.

For the moment, most analysts say that's highly unlikely.

China's greater resolve in finally bridging the gap with global crude oil costs -- now about 40 percent higher than domestic gasoline and diesel prices -- highlights the disparity with India, where prices are about half global rates.

CALL TO PUSH AHEAD

With headline inflation easing for two straight months to 7.1 percent in June and the world's fourth-largest economy likely to expand at a more modest pace next year, falling oil could not come at a better time for China.

Local economists are calling more loudly and insistently for policymakers to quicken price reform, first by bringing pump rates closer to crude costs to relieve refiners' losses, allowing Beijing to end its multi-billion-dollar subsidies.

They say retail gasoline and diesel prices would need to rise another 40 percent to match crude at $125 if Beijing removes tax incentives -- still a big gap, but within reach given the surprise 17-18 percent rise a month ago.

Although China has allowed prices to rise annually by only about 15 percent since 2004, Beijing-backed investment bank China International Captial Corp Ltd (CICC) is advising the government to move faster by closing the gap by the end of 2009.

"Chinese fuel prices are still way below international levels. The last increase is the first step in normalising energy prices," said Xing Zhiqiang, an economist at CICC.

If food price pressures ease next year, a 40 percent rise over the next 18 months would keep consumer prices within their current range of 7-8 percent, Xing told Reuters, "a tolerable level for the government."

Since 2003, Chinese fuel prices have doubled, but crude prices CLc1 have surged more than fourfold.

Rather than abandon controls completely, Beijing could opt for smaller but more frequent price increases that help accustom consumers to regular changes, while targeting subsidies at weak consumers, such as farmers, fishermen and cab drivers.

"At this stage, the policy subsidises the urban middle-class with their new cars," said European Chamber's Wuttke. "This is not a sustainable policy."

INDIA'S RELIEF

In India, policy appears far more likely to be driven by short-term political considerations than long-term goals.

Following Dehli's 10 percent fuel price hike last month, the focus now seems to be on when Asia's third-largest oil user may cut fuel prices instead of raising them, as its ruling coalition government prepares for a general election 10 months away.

New Delhi raised prices on June 4, the second increase this year and its largest hike in a decade. But in the past it has been much quicker to cut rates than it has been to raise them.

"Given the revision six-seven weeks ago, the current high inflation and political compulsions, falling global prices have provided a much-needed respite to the government," said Amitendu Palit at the Institute of South Asian Studies in Singapore.

"If crude prices soften further towards the later part of the year, there might be cuts in domestic prices. That will not only moderate inflation, but will also be a political win."

For now, Indian oil officials have ruled out an immediate price cut, as refiners are still bleeding sorely while the government is handing out billions of dollars of subisidies through oil tax cuts and oil bonds.

Refiners say they are selling fuel at the equivalent of about $67 a barrel, half current costs.

"Prices have to stabilise at lower levels at least for six months to build up a case for a cut in retail prices," said an oil ministry official who declined to be named.

Source: http://in.reuters.com/articlePrint?articleId=INPEK29771320080725