Can rising fuel cost cut China demand?

Chinese motorists, long accustomed to cheap gas, seemed to take in stride a government decision to boost fuel prices Friday by as much as 18 percent.

“Maybe I might drive a bit less. But if it's for business, then if I have to drive, I will,” said He Ping, a trading company employee who refilled his VW Jetta at a Beijing gas station.

There were at least a dozen vehicles behind him in line.

While higher prices for China's state-controlled fuel will inevitably squeeze consumers at both filling stations and grocery stores, analysts say it is unlikely to make an immediate or huge dent in the country's hunger for oil.

China's economy is booming, and people are buying cars and air conditioners as their incomes grow. There is huge pent-up demand in a country of 1.3billion, where per capita energy consumption remains far below western nations.

The silver lining is that with the government increasing prices, refiners may finally boost production of gasoline, diesel and other refined products, helping to alleviate long lines at gas stations and a widespread fuel shortage.

Refiners have cut production because they were losing money on the wide gap between global crude oil prices and state-set retail prices. While the government paid billions in subsidies to China's two big state-owned refiners, many smaller refiners were shutting down.

“Do not expect an immediate fall in China's oil imports – the price effect on demand will work in China as well, but it will take some time to work through,” Wang Tao, an economist for UBS Securities, said in a report issued Friday.

Crude oil prices Friday jumped more than $4 per barrel at one point on the New York Mercantile Exchange after tumbling a day earlier on news that China's National Development and Reform Commission would raise prices for gasoline and diesel fuel by 16percent and 18percent, respectively.

Some analysts said the oil market may have overreacted to the news from China, with some traders buying oil futures on the belief that their climb will continue.

“Whether domestic demand cools, or the price increase simply serves to bring more refining capacity on line to satisfy China's voracious appetite, remains to be seen,” said Jing Ulrich, chairwoman of China equities for JP Morgan Chase & Co.

The government last hiked fuel prices by about 11 percent in November. It froze prices to avert further inflation, which has touched 12-year highs since the beginning of the year.

To protect individual consumers, the government said it would not allow any increases in bus and subway fares or taxi fares. Natural gas and liquefied petroleum gas prices will remain unchanged, and subsidies to the poor and to grain farmers would increase, it said.

Areas in Sichuan province, hit by a massive earthquake last month, were exempt from the increases, state media reported.

Didi Tang in Beijing contributed.