SHANGHAI ENERGY EXPERTS: FUEL SHORTAGES EXIST, BUT NOT IN

UNCLAS SHANGHAI 000295 SENSITIVE SIPDIS STATE FOR EAP/CM, EB/ESC AND OES/PCI TREASURY FOR AMB. HOLMER, WRIGHT, TSMITH, AND OASIA - DOHNER, HAARSAGER, CUSHMAN USDOC FOR ITA MAC DAS KASOFF, MELCHER, MCQUEEN NSC FOR WILDER AND TONG E.O. 12958: N/A TAGS: ENRG ECON ETTC EINV CH SUBJECT: SHANGHAI ENERGY EXPERTS: FUEL SHORTAGES EXIST, BUT NOT IN SHANGHAI REF: Shanghai 284 ¶1. (SBU) Summary. According to Shanghai energy experts, price controls are primarily to blame for gasoline and diesel shortages. However, because Chinese oil companies control both up and downstream processes in fuel production, they can more easily cope with price controls then power generators. Controls will likely continue until inflation decreases in the second half of 2008. However, because of Shanghai's and other major East China cities' economic importance, it is unlikely that cities in East China will suffer from significant fuel shortages. End Summary. Price Controls Responsible for Fuel Shortages -------------- ¶2. (SBU) Econoff met with local energy experts to discuss power and fuel issues in East China. See reftel for a report on coal issues. Interlocutors pointed to price controls as the primary source of fuel shortages. Without an effective pricing mechanism, the market is not able to find its equilibrium, resulting in over demand and under supply. A McKinsey consultant on July 15 observed that unlike China's fragmented power sector, China's oil companies control both up and downstream processes in fuel production. Controlling both upstream and downstream production allows them to more easily cope with price controls, using upstream profits to offset downstream costs he noted. Oil companies have therefore found it easier to cope with price controls than power generators. A BHP Billiton energy analyst in a meeting on July 15 added that if the consumer price index (CPI) lowers during the second half of 2008 as many expect, the government will have more room to bring fuel prices closer to their market value. ¶3. (SBU) During a meeting on June 17 Utility and Machinery Sector Researcher Manop Sangiambut of CSLA added that the government is mandating more crude oil be refined into gasoline and diesel. He noted Sinopec was recently ordered to limit production of petrochemicals. He explained that oil refiners, unless mandated to do otherwise, often stop refining gasoline in favor of other products whose price is not controlled. Historically this has led to overproduction of petrochemicals, commonly used to make fertilizers, and underproduction of gasoline and diesel. East China Cities Will Not Face Shortages -------------- ¶4. (SBU) Interlocutors are optimistic, however, that fuel supplies in Shanghai and other major cities in East China will be sufficient. Shanghai Economic Commission Deputy Director of Economic Operation Department Wu Jin Cheng in a meeting on June 18th noted that Shanghai has two major refining facilities with enough capacity to meet the city's demand. The central government directs crude oil imports and keeps the refineries well supplied, while major oil companies (Sinopec and Petrochina) determine how much to refine. Interlocutors noted because Shanghai and other East China cities are major economic and commercial centers, the government ensures they have a steady fuel supply, placing the fuel shortage burden on other parts of China. JARRETT