China Readies 'Bitter Pill' to Slow Petroleum Demand

Beijing considering unpopular national tax of 20-50 percent on retail gasoline and diesel in effort to slow runaway fuel demand in the world's second-biggest oil consumer.

Published: 05-Apr-2005

a's energy planners are ready to take the bitter pill of an unpopular nationwide fuel tax to put the brakes on runaway fuel demand in the world's second-biggest oil consumer.

Analysts say Beijing is likely to consider a 20-50 percent tax on retail gasoline and diesel prices, which are among the world's lowest, emulating western Europe's policy of using high taxes to promote energy conservation and protect the environment.

But imposing a tax at a time of record-high oil prices could hamper key economic sectors and anger the country's hundreds of millions of farmers, consequences which may delay any imminent implementation despite a surging dependence on fuel imports.

"Beijing has well realised that the level of China's energy use demands a high tax levy. It will not be imminent but will be soon -- in a year or two," said Yang Fuqiang, the Beijing chief of the US-based Energy Foundation, which assists China in formulating sustainable development policies.

Analysts say China may opt to introduce the new tax in phases to allow consumers to gradually adjust to higher costs and avoid any big negative impact to business and industry.

But Beijing would have to boost prices by at least 25 percent to make a perceptible dent in demand, they say.

China's oil imports hit a record in 2004, making up more than 40 percent of its 6.4 million barrels per day (bpd) of demand. That dependence is set to rise to roughly 65 percent by 2020.

Swelling car ownership, sharply growing transport and petrochemical sectors, and a persistent power shortage drove consumption up almost 16 percent last year.


Demand remained robust despite international crude prices soaring past $50 a barrel as Beijing kept a rigid cap on retail prices to keep inflation in check and protect consumers.

The government raised retail gasoline prices last week by 7 percent, the first increase since August but viewed as too little too late to have any significant impact on demand.

Analysts say China would do its best to implement a new retail tariff with prices at peak levels if it is really going to tackle its growing dependence on foreign oil.

"The best time to introduce taxes is when prices are high to curb demand and promote new technologies," said a senior tax researcher at State Council, who declined to be named.

Yang from the Energy Foundation said the government should be confident that the world's seventh-largest economy could prove to be more resilient than expected to absorb higher prices.

"It's like you catching a cold. But it will help improve your immunity," he said.

Finance Minister Jin Renqing said this month Beijing was determined to enforce the fuel tax, but the timing was crucial.

"The government is worried a big jump in oil prices may slow growth in key economic sectors. They don't want to see taxi drivers go on strike and trucks blocking up highways," said Yang.


Higher fuel costs may encourage the ballooning, but minority, young middle-class to buy energy-efficient, low-emission vehicles instead of gas-guzzling sport cars.

But a sharp drop in car sales would hurt the auto-making sector, one of the country's cornerstone industries and a key tax revenue source for 80 percent of Chinese provinces.

A big jump in the price of diesel would raise costs at manufacturers, which ship goods from the poorer inland regions to the booming coast for export. It would also threaten stability in China's 800-million strong rural community, which uses the fuel for ploughing and irrigation.

Diesel makes up a third of total Chinese oil demand, double that of gasoline.

The idea of a fuel tax was initiated in 1994, when oil was below $20 a barrel, as a means of replacing road tolls. But volatile prices and issues such as how to split tax revenues among government agencies have held it up so far.

"Oil prices can't possibly go back to $25 a barrel. Shall we wait forever?" said Yang Zhigang, head of tax research at the China Academy of Social Science.

China levies a 17 percent value-added tax and a fixed consumption tax of 117.6 yuan ($14.2) a tonne for diesel and 277 yuan a tonne for gasoline.

The consumption tax accounts for 6 percent of the retail gasoline price and 3 percent of diesel's pump rate. These are sharply below tax rates of most OECD countries at 20-70 percent, which includes VAT.


Visits to China, India, Malaysia and Pakistan are significant because the trip spells out the Saudi Kingdom's Look East policy, representing a new reorientation in its foreign policy that was heavily tilted toward the West.

The worst two scenarios suggest a drastic decline in output to 875,000 barrels a day by the end of 2007 and to just 520,000 a day by the end of 2008.

Bush said he envisioned a future in which a plug-in hybrid car could drive 40 miles on a lithium-ion battery, then stop at a filling station for ethanol, a fuel usually made from corn, similar to HyMotion Prius pictured below.


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