China's bid to end fuel shortages by ordering refiners to beef up supplies puts only a temporary cap on a problem that may keep bubbling up until the government bows to market forces.
If global crude prices have not retreated by the time Chinese oil demand surges again in spring for the lunar new year and planting, the temporary truce between technocrats and state-owned but publicly listed oil firms may crumble.
The state can order us to beef up supply in the short term, but it's only a temporary relief. What about next month, what about the spring festival? said a Sinopec refinery official.
Beijing this week acknowledged that holding domestic fuel prices below international market levels, without compensating refiners, was causing shortages it could not fully control. It is already spending over $5.6 billion on fuel subsidies for vulnerable groups in 2007.
Torn between concern about dry pumps and worries over poorer consumers and already-high inflation, the government has used its political muscle to force a compromise that has eased fuel flows.
There should not be any big problem to maintain a fragile balance between oil product demand and supply in the short term with those supply side measures in place, as the peak demand season in the fourth quarter is nearly past, said Qiu Xiaofeng, an oil analyst with China Merchants Securities.
But China's fuel shortages may resurge and intensify from the second quarter of next year if oil prices stay at current levels, Qiu said. Then the government would have to resort to pricing moves.
China was forced to raise prices 10 percent at the start of November to ease its worst diesel crisis in four years, when refiners shied away from supplying a loss-making market in the run-up to the winter demand season.
The first for 17 months, it provided temporary relief but still left prices below global markets, with refining margins firmly in the red and diesel supplies too low to meet demand.
Benchmark U.S. crude oil futures remain above $90 a barrel, and before the latest price hike the Chinese oil majors had said they needed oil around $60 a barrel just to break even. They have declined to say what new break-even levels are.
China's red hot economy, up 11.5 percent in the first three quarters of the year, bears part of the blame for fuelling demand and stretching refiners' capacity.
But the country's rigid pricing system, which belies an official commitment to free up resource costs, is the main problem because it destroys incentives to supply the market.
This is especially true for independent refiners who are largely immune to political pressure.
By cutting back supplies to the point where there are shortages, oil firms create a potent reminder to the government that their refining margins are suffering, even if they risk official displeasure in the process.
China's efforts to move towards market pricing in the sector dominated by majors Sinopec (SNP.N: Quote, Profile, Research)(0386.HK: Quote, Profile, Research) and PetroChina (PTR.N: Quote, Profile, Research)(0857.HK: Quote, Profile, Research) may also be hampered by the companies' own success, as officials fear the two could abuse their duopoly in a more open market.
Domestic competition in the sector is still inadequate, China's top energy official, Chen Deming, said recently in a television interview.
But the political pressure it relies on instead has not proved strong enough to rein in even those limited market forces the central government has unleashed.
The National Development and Reform Commission, the country's top economic planner, had said at least five times in two weeks that it would strictly enforce follow pricing controls, as illegal hikes persist despite two earlier admonitions.
Both the country's top two firms have also already slowed the start-up of newly built refineries over price worries, Qiu said in a report emailed to Reuters.
And in early December, rationing and shortages remained in at least some stations run by an oil major near several highways in Guangzhou, the capital of Guangdong province.
We only do what we are told by our boss, said a staff at a station near the Guangzhou-Shantou highway when asked if they knew that rationing had been banned in the province from Nov. 24.