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Last Updated: Friday, 2 November 2007, 14:54 GMT
China's fuel dilemma
By Dan Griffiths
BBC News, Beijing

Oil rig
China is consuming more oil than ever before

China's decision to raise fuel prices by almost 10% is a surprising move.

In September the government promised to keep rates at current levels.

But it now says rises are necessary to prevent inflation and social unrest. So why the change?

Beijing has long had a system of price controls on fuel.

But it can not ignore what is happening in the rest of the world.

While oil prices have been skyrocketing, domestic price controls mean that Chinese refiners are unable to pass those rises on to Chinese consumers.

Fuel shortages

That has meant a growing gap between the soaring global price of crude oil and domestic fuel prices.

Consequently, Chinese oil companies are losing money and are reluctant to increase production, knowing that would lead to even higher losses.

A man walks past a board showing fuel prices
Some petrol stations have already had to close

The result is fuel shortages across the country.

Large lines are a common sight outside many filling stations. Some have already shut down and tempers are rising.

State media reported that one man was killed in a fight after he tried to jump the queue at a petrol station in central China.

The government is hoping that higher prices will encourage oil refiners to boost output and reduce the fuel crisis.

But many companies may feel that the price hike is still not enough, especially if global oil prices continue to rise.

Inflation worries

Behind all this is China's insatiable appetite for oil.

The country's booming economy is sucking up crude at record rates and China is now the world's second largest consumer of oil after the US.

Net imports in the first eight months of this year soared by nearly 20%.

Chinese currency
Beijing exerts a tight control over the yuan

But rising fuel prices may have created another economic headache.

They are likely to add to soaring inflation which in August hit a 10-year high of 6.5%.

The central bank has already raised interest rates several times this year and another hike is likely before the end of the year.

Many analysts think that the increases are still not enough to curb inflation.

The government worries that inflation could lead to social unrest - rising prices were one of the factors in the run-up to the Tiananmen Square protests in 1989.

Currency reform

Experts suggest that one way to rein in inflation would be to allow China's currency, the yuan, to float freely.

It currently trades within a narrow band set by the government.

But Beijing is unlikely to undertake dramatic currency reform.

It worries that any move to float the yuan could make Chinese goods more expensive, which could damage the country's export industry - a crucial player in the Chinese economic miracle.

China's economy continues to boom, but that growth is starting to throw up challenges for the nation's policymakers.

Taking action to solve one problem may cause difficulties in another sector of the economy.

The country's leaders are discovering that success comes at a price.

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