By staff reporter LU RUCA

The impact of rising international oil prices on China is apparent in the increased economic pressure on its domestic market and upon relevant industries and consequently upon the Chinese car-owning public.

Auto Owning Economics

At 22:00 p.m. on July 22, householder Zhang Jun's friend called to warn him that oil prices were set to rise the following morning. Zhang immediately drove to the nearest gas station and found dozens of other car owners waiting to fill up in anticipation of the rumored price rise. Sure enough, the following day the price of No. 93 gasoline rose from RMB 3.96 to 4.26 per liter.

Four weeks earlier, on June 24, the price of No. 93 gasoline just rose from RMB 3.79 to 3.96 per liter, which came on the heels of a rise in the New York crude oil futures market to a record US $60 per barrel -- the highest since 1983 - on June 20, 2005. The National Development and Reform Commission (NDRC) linked the increases in domestic oil prices to those on the international oil market. This was by no means the first time the NDRC had made such a reflexive response to international stimuli, which to Beijing's 1.65 million private car owners constituted an economic body blow.

Zhang Jun commutes 15 kilometers to his workplace and encounters traffic jams almost daily. In July 2002 when he became a car owner, the price of No. 93 gasoline was RMB 2.8 per liter, or RMB 8 per day. In just three years this has risen to RMB 15 per day - almost double -- while his RMB 4,000 per month salary has increased by less than 2 percent. A friend of Zhang's who recently returned from the United States calculates that the per capita monthly salary of an employee in Beijing is RMB 2,360 (US $291), compared to US $3,000 earned by his American counterpart, yet the price of oil is higher in Beijing than in the United States.

The price of gasoline is now a prime consideration for anyone in China planning to buy a car. Yang Dan recently married, and intends to buy a house in Tongzhou District, about 20 kilometers from downtown Beijing, where house prices are low. She thought the difference in price between accommodation downtown and in the suburbs would enable her to afford a GM Buick Excelle, but the ten liters of oil per 100 kilometers it guzzles forced her to reconsider. Yang Dan and her husband have now plumped for either a Korean or Japanese low-fuel consumption auto. "If oil prices continue to rise, we'll simply scrap our plan to buy a car and take the subway to work," says Yang Dan resignedly.

Auto dealers sadly testify to this trend among China's potential car owners. A salesman at the Yayuncun-based FAW Volkswagen dealership, who prefers to be referred to as Mr. Liu, talks despairingly of customers that were all set to buy from his showroom, but who changed their minds because of fuel consumption considerations.

Cars most affected by oil prices are SUVs (Sport Utility Vehicles). Recent statistics show that from January to April of 2005, the sales volume of all 17 Chinese SUV manufacturers declined, some with a margin as high as 97 percent. In sharp contrast, economy cars with a fuel consumption of 4 liters per 100 kilometers, such as Chery QQ, Chang'an Alto, and Spark made by SAIC-GM Wuling Automobile Co., Ltd., are gaining popularity. The cheaper, diesel-fuel powered autos by FAW-Volkswagen such as the Jetta, Bora and Audi A6 also sell well, the demand for the Bora TDI (Turbo Direct Injection) and Jetta SDI exceeds supply.

Negative Impact on Income

Taxi drivers are understandably disgruntled at oil price rises, as they directly affect them. Zhang Guisheng, a cabbie with the Beijing United Crescent Taxi Company who drives a new Sonata, comments, "It's all very nice to be out of the summer heat in the cool of my cab, but air conditioning consumes 4 liters of gasoline per 100 kilometers." Zhang goes on to explain that he clocks up 300 kilometers per day, and that gasoline costs him RMB 150 per day. His Sonata runs on No. 93 gasoline, compared to the cheaper No. 90 gasoline that was adequate for the Xiali he used to drive, obliging him to spend 500 yuan more on gas per month, and to work much harder, therefore, to maintain his level of income.

The local governments in certain cities in Shandong Province have imposed an additional one yuan fares on taxi users in order to lighten the burden on taxi drivers, a measure that was actually considered in the capital when oil prices rose last August, but which caused such an outcry that it was shelved.

Similar problems have also occurred within public transportation and the civil aviation industry. Since 1999, the price of diesel has increased from RMB 1.96 to nearly RMB 4 per liter, and that of gasoline from RMB 1.78 to more than RMB 4 per liter, which means that oil now constitutes 30 percent of total running costs. Some buses in Beijing have been installed with an energy storage device that retains the energy the bus generates upon braking and releases it when accelerating. A new type of bus that runs on dimethyl ether rather than gasoline or diesel has gone into production in Shanghai.

But the effect of oil price rises is most apparent in industry. Most power plants in southern China depend on oil, and imports of fuel oil in South China make up 70 percent of the national total. When oil prices rocket, power plants have no alternative but to reduce their power generation in order to control costs. More and more manufacturers of light industrial products are now actively seeking alternative energy sources, such as natural gas and coal tar.

Oil price rises have negative impact on many trades, but it may be assumed that they benefit industries related to petroleum. This is not, however, the case, according to statistics released by the National Bureau of Statistics. In the first five months of 2005, China's petroleum processing industry suffered all-round losses, and 80 percent of small oil-refining enterprises operated at a loss. China's refined oil product prices are set according to prices in Singapore, New York and Rotterdam. It is only when the increase in the weighted average prices of oil in all the three places exceeds 8 percent that the National Development and Reform Commission responds by fixing new standard retail prices for refined oil products accordingly, plus transportation fees. Under this pricing system, refining enterprises such as Sinopec import crude oil at high prices, but as they must sell their products at low prices, are often obliged to absorb the difference. As the price of crude oil keeps rising, refining enterprises limit their production to reduce losses. It is only upon rises in refined oil prices that there is expansion of refined oil production. This practice exerts pressure on fuel oil consumers -- enterprises and individuals.

Development by Thrift

In some quarters, the rise in international oil prices has been blamed on China's oil "thirst" as a result of its rapid industrial expansion.

China's 2005 oil consumption has been estimated at 320 million tons, one third of which relies upon imports. This represents an increase of 11 percent over the 2004 figure of 288 million tons. Yet China's oil imports make up only a small percentage of world total oil imports. In 2004 the United States imported 500 million tons of oil; Japan, 200 million tons; and Europe 500 million tons, while China imported only 120 million tons, making up 6.6 percent of the world total, according to the World Energy Resources 2005 jointly released by BP and the China National Development and Reform Commission. It is, therefore, as stated at a press conference by Xu Dingming, deputy leader of China State Energy Leading Group, unfair to attribute the rise of international oil prices solely to China's increasing oil demand.

It must also be remembered that the rise in international oil prices has cost China dearly in foreign exchange. In 2004, China imported crude oil valued at US $33.91 billion, of which US $7.068 billion was paid on the price increase. In view of further oil price rises in 2005, China will need to dig even deeper into its foreign exchange reserves to foot its oil bill.

In 2003, China began to implement measures to reduce its excessive reliance upon imported crude oil by building state petroleum strategic storage bases in Zhenhai of Zhejiang Province's Ningbo, whose first-phase project, according to vice-chairman of Sinopec Wang Jiming, will be complete at the end of 2005; in Daishan of Zhejiang Province's Zhoushan; in Huangdao of Shandong Province's Qingdao; and in Xingang of Liaoning Province's Dalian.

Meanwhile, resource-saving economies are high on the central government agenda. The state will formulate financial and taxation policies that encourage production of low oil consumption and small displacement cars. It will also adjust policies regarding import/export of high-energy consumption products, and support the development of alternative energy sources.

Upon joining the WTO, China guaranteed that at the end of 2006 it would open its crude oil and refined oil products market. Cao Yushu, deputy secretary-general of the NDRC, has pressed for reform of China's oil circulation system, and China's projected goals in this respect are reform of its refined oil products pricing mechanisms and resolution of the problem of time lapse between changes on the international oil market and its response to them. China will also open its wholesale links by opening its domestic market and eliminating the monopoly of Sinopec and Petrochina, its two main wholesalers. It can then relax its control over oil resources and genuinely compete within the oil import market.