Chinese cut fuel subsidies but demand fears remain

JEDDAH: China's decision to hike prices for petrol, diesel and electricity has won praise from the United States despite fears it could spark increased demand, analysts say.

China became the latest Asian nation to curb energy subsidies last week after hiking retail petrol and diesel prices as much as 18 percent.

Oil prices, which hit a record near 140 dollars per barrel on Monday, had swung lower on Thursday after China revealed the subsidy cuts. But they bounced higher Friday as traders grew sceptical over the full market impact.

"Crude oil prices fell immediately following the announcement, on the prospect of lower demand from China, but the impact of the price increase is ambiguous," said Standard Chartered analyst Helen Henton.

"In improving the profitability of importing and refining, higher retail prices may actually stimulate further demand by relieving shortages.

"Overall, however, the extent of the price jump suggests some softening of oil demand growth is likely."

Western nations led by the United States argue that many emerging Asian economies are artificially propping up record high oil prices with subsidies.

The move by China could therefore dampen global demand in the long run as Chinese cut back their energy usage, and lead to lower prices, according to Cameron Hanover analyst Peter Beutel.

"This is good news because it means that Chinese consumers will start to feel more of the pain so evident in the United States," Beutel said.

"Some frivolous use by Chinese consumers could come to an end through higher prices."

He added: "The closer to real prices that are experienced worldwide, the more the pain is apparent -- giving consumers the information they need to make informed choices that will allow real demand to be met by scarce, available supplies."

Saudi Arabia hosted a high-profile Jeddah oil summit on Sunday which was aimed at combatting runaway oil prices.

The one-day event also featured US Energy Secretary Samuel Bodman, Chinese Vice President Xi Jinping and other representatives from leading consumers and producers of black gold.

The United States and China are the first and second biggest oil consumers in the world.

Bodman, addressing reporters in Jeddah, has welcomed Beijing's decision to cut subsidies on fuel and said it would help calm the red-hot market.

"The steps that the Chinese took, although viewed by some as courageous, were exactly the right sort of steps to take," Bodman told a press briefing in the run-up to the Jeddah summit.

He added: "The world has to move away from market-distorting, untargeted fuel subsidies that in my judgment make matters worse."

China's move was aimed at reducing the gap with the soaring cost of crude oil on international markets.

Industry experts say China's voracious appetite for oil to power its record-breaking economic growth has been a crucial factor behind sky-high prices.

"China has joined the growing line of Asian economies scaling back domestic subsidies in the face of persistently high oil prices," said Henton.

Elsewhere in Asia, Malaysia has hiked fuel prices by 41 percent and Indonesia by around 29 percent, while Taiwan and India have also raised their energy costs.

Beijing had not been predicted to alter its fuel subsidy system until after the Chinese capital stages the Olympics this summer, Henton added.

"The move surprised the market in both its timing and magnitude. Many expected the move to be delayed until after the Olympics," she said.

According to Bodman, around 30 million barrels per day of oil was consumed in nations that subsidise gasoline.

"That's simply too much. If there is anything that is clear, the world needs help in this regard," Bodman said.