And you thought the Chinese had it made

China Sharply Raises Energy Prices

HONG KONG — Faced with increasingly severe fuel shortages and the prospect of power failures during the summer air-conditioning season, the Chinese government unexpectedly announced sharp increases late Thursday night in regulated prices for gasoline, diesel and electricity.

The increases are the latest sign of how China’s integration into the global marketplace has limited the flexibility of the country’s leaders in responding to economic crises.

The government has come under intense pressure recently from both environmentalists and other governments to ease up on its fuel subsidies, which are blamed for distorting global markets, encouraging greater consumption and pushing oil prices higher for other nations.

The government, like many around the world, has struggled to keep up those subsidies as oil prices have spiked in recent months. Finally, despite fears that it will spur inflation, the government raised the retail price of diesel by 18 percent, to the equivalent of $3.58 a gallon, and the price of gasoline by 16 percent, to $3.83 a gallon. Electricity tariffs and the price of jet fuel were also raised.

The higher prices could prompt businesses and people across China to use less fuel and electricity, potentially slowing China’s voracious oil consumption as well as its steep rise in emissions of global warming gases. Following the news, world oil prices immediately dropped more than $4 per barrel.

But some experts said the Chinese market was so heavily distorted by state subsidies for fuel that the higher prices might encourage refiners to produce more gasoline and diesel for Chinese consumers, possibly stoking new demand.

Either way, higher energy costs threaten not only to push up prices here, but also the prices of many of the goods China ships to the United States. Inflation in China was 7.7 percent last month and over 8 percent in February, March and April. While top Chinese officials are worried about inflation, they have faced another problem in recent weeks: the Shanghai stock market has slid steeply, leaving large numbers of angry shareholders.

Hours before the government raised energy prices, the Shanghai market had plunged 6.5 percent in Thursday trading, falling partly on worries of heavy losses among Chinese energy-related companies, which have been selling fuel and energy for less than it costs to produce them.

Until now, the government’s preoccupation with consumer price inflation had many economists wondering when fuel prices would be allowed to rise at all, despite problems in the stock market.

China is the world’s second largest oil consumer, after the United States. With the announcement Thursday, China became the eighth Asian country to raise fuel prices in the past month after concluding that low retail prices could not be sustained indefinitely through government subsidies.

American concerns about China’s price controls on fuel were raised as recently as this week in high-level economic talks between China and the United States in Annapolis, Md. Treasury Secretary Henry M. Paulson Jr. raised the subject during the talks, which took place Tuesday and Wednesday.

Mr. Paulson, in a speech the previous week, called on China to lift controls and cut subsidies in the energy sector, arguing that they were harmful to the dynamics of supply and demand. Fuel price controls, he said, were producing “persistent gasoline and diesel shortages” in China, and also contributing to “power outages during snowstorms this past January and February.”

Price controls, he added, also “often lead to smuggling and corruption” as well as shortages that contribute to global price spikes in the energy sector.

Treasury officials did not say Thursday that American pressure had led to the change in China’s policies, but they welcomed the move as a possible sign that China was listening to analysts from other countries.

Chinese officials have spoken for several years of their desire to move toward a more energy-efficient economy. They have periodically mentioned an intention to impose taxes on energy once world oil prices begin to fall, so as to keep the pressure on Chinese businesses and consumers to improve efficiency.

Prices for gasoline and diesel had been fixed since Nov. 1, even as world oil prices rose 45 percent in that period. If the Chinese retail price increase on Thursday has a lasting downward effect on world oil prices, it could strengthen the position of economists who have argued that the United States should raise gasoline taxes to limit demand and drive down global oil prices.

Until now, the government’s subsidies have forced the state-controlled refiners to lose money by selling gasoline and diesel for less than the cost of the crude oil needed to make them. Power companies, too, have become reluctant to operate oil-fired power stations when they cannot sell the electricity for enough money to cover the cost of oil.

As refineries cut back their output this spring, the result has been crippling fuel shortages, particularly for diesel. Those shortages have already produced long lines of trucks at service stations, and might threaten the gathering of the summer harvest.

President Hu Jintao and Prime Minister Wen Jiabao took the highly unusual step on June 5 of ordering that tractors and other farm vehicles be given top priority for all supplies of diesel — usually the kind of measure that would be handled by far more junior officials.

Farmers were exempted on Thursday night from the latest increase in fuel prices, as were three provinces damaged in earthquakes last month: Sichuan, Shaanxi and Gansu Provinces.

Power plants that rely on oil have also been shutting down because of high prices. While China relies mainly on coal and hydroelectric power for electricity generation, oil-fired plants are important in southeastern China.

Severe snowstorms in January and February, followed by earthquake damage and disruption for the national rail network last month, have interfered with coal shipments to some power plants and made electricity generation from oil-fired plants even more important.

China struggles each summer to generate enough electricity, although there have been a few signs that electricity generation capacity is beginning to catch up with demand. The government also announced on Thursday night that it was limiting increases in coal prices, which would help power companies afford their fuel — although at the risk of introducing the same kind of price control distortions to the coal market that have already caused problems for diesel users.