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.

Of course, this hike in gasoline prices will increase inflation in China, but the country will try to offset the price jump by increasing its energy efficiency. This is already taking place as China attempts to move away from energy intensive low-end manufacturing into higher value-added, knowledge-based industries.

Some think that this hike in fuel prices will cause energy demand in China to taper and the country to turn to more energy-efficient ways, but I don't think this will be the case. Rather, I don't think that there will be any significant reductions in Chinese energy demand any time soon. That's because the Chinese government is more focused on growing the country's economy over energy efficiency. So the economy will still grow along with energy demand, and even if the price of energy increases, too.

Because of this, I am recommending a company to profit from rising oil prices. My China Strategy subscribers have so far made 165% profits on this play, and I expect more to come. To find out more about this company and my buy advice for it, join China Strategy today!

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