Cablegate: Shanghai Energy Experts: Fuel Shortages Exist, but Not In

VZCZCXRO9969
RR RUEHCN RUEHVC
DE RUEHGH #0295 2130618
ZNR UUUUU ZZH
R 310618Z JUL 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7017
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHAAA/NSC WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 0339
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7587

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

© Scoop Media