Yesterday, I heard from a friend that gas stations just outside of Shanghai were rationing diesel, again. I haven’t been out there to see for myself, but I have no reason to disbelieve this person (looks like Reuters has picked up on the story, tool). This is nothing new, either: price-induced fuel rationing has been a fairly regular occurrence in China for the last couple of years.
[UPDATE 3/21: I was in Shanghai’s Putuo District this evening, and while riding in a taxi on a main thoroughfare I saw long lines at several Sinopec and PetroChina stations. I didn’t stop to ask, but I think that it’s a pretty safe assumption that those lines are the result of the fuel rationing reported elsewhere in China (and the suburbs of Shanghai) over the last few days. “Fuel rationing in Shanghai” … is anybody reporting this? Seems like a significant story – to me, at least.]
And nobody knows this better than the good folks at PetroChina, which – today – disappointed investors by announcing that 2007 earnings growth was an anemic 2.39%. Truly, this is no small trick: the price of oil rose 9% over the same period, and though it’s unreasonable to expect oil companies to pace the price of their primary commodity, one would expect the world’s “first trillion dollar company” [chuckles from the gallery] to pace the 4% earnings growth of Exxon Mobil, the world’s most profitable oil company.
Of course, the world’s most profitable oil company isn’t allowed – or required – to sell in China, where strictly enforced price controls basically guarantee that – in a time of rising crude prices – refineries lose money on every barrel processed and sold to fuel stations. It works (or doesn’t work) like this: PetroChina claims that its break-even point on refined crude is US$67/barrel, leaving it two choices – either lose US$40/barrel (at current prices) on refined crude, or simply shut down the refineries until prices fall and/or Beijing loosens or eliminates price controls. Reasonably, many refineries have taken the latter approach, resulting in the periodic rationing reported outside of Shanghai and elsewhere in China.
But don’t feel too bad for PetroChina. Like its rival Sinopec, the company can expect to receive a multi-billion dollar refining subsidy from a central government flush with cash and willing to throw it at an inflation problem that it seems – so far, at least – incapable of controlling (and for those who ponder what China plans to do with its multi-trillion dollar currency reserves, well, these subsidies are a pretty good hint going forward into the next twelve months of an inflationary economy).
So what’s a growth-hungry state-owned oil company to do? According to a company statement accompanying the earnings release, PetroChina is going to turn its attentions to overseas opportunities where returns are all but guaranteed to be better. Whether that means opening refineries and stations outside of China, they don’t say. But from my perspective, this is an interesting and potentially significant development in the operation of Chinese state-owned businesses. In effect, if PetroChina’s statement is to be taken as truthful, the company will reconfigure its operations so that less regulated markets outside of China in effect subsidize money-losing (or, more likely, less profitable) operations in China. The question, now: where will PetroChina’s overseas operations be extended, first?