China has been forced into an inflationary boost to domestic oil product prices by the surging world price which yesterday topped $US96 a barrel.
The Chinese Government raised the price of petrol, jet fuel and diesel by almost 10% in direct contravention of last month's edict that all state administered prices were to be frozen until the end of the year at the earliest.
The rise was the first since May 2006, and shows how the country's oil processing industry has been squeezed by an oil price which has $US100 a barrel in its sights.
Oil prices rose by $US5.50 in a day yesterday on a shortfall in US oil inventories and then the speculative move after the US Federal Reserve cut interest rates, by 0.25%, which in turn knocked the greenback lower and sent the prices of oil, gold and other commodities higher.
Oil rose through $US94 a barrel, then $US95, to peak around $US96.21.It then fell in the US overnight to around $US93.50 a barrel as the US dollar reversed direction and rose and new worries emerged about the US economy.
Gold rose to $US801.50 an ounce before retreating to around $US793 an ounce overnight.
The optimism of the US interest rate cut evaporated overnight.
But the Chinese price rise news came as the market was pushing the price through the $US96 a barrel level.
The news of the increase will be a difficult sell for the Government: it shows the futility of the price freeze and the uselessness of controls when confronted by a rapidly rising commodity price.
It also shows the limitations of the Chinese economy and the growing worries the government have in controlling the strong growth, on which the Australian economy depends so much.
China put the price controls in place after inflation hit an annual rate of 6.5% in August, thanks to a shortage of pork which has been hit by a drop in production resulting from a serious infection in pigs.
The controls came into being just before the Communist party Conference which started on October 15. Reports from Beijing said the controls would remain in place until the end of the year, while other sources spoke of them staying in place until after the 2008 Beijing summer Olympics next August.
Inflation eased a touch to 6.2% in September, but non food inflation remained around 1%.
This will not be boosted by the sharp rise in petrol and diesel prices.
The rise will mean that the Chinese authorities will probably be forced to tighten monetary policy again in the next month to try and restrain price growth.
Growth slowed to 11.5% in September from 11.9% in August and the suggestion was that there may have been a pause in the monetary policy tightening of rate rises and restrictions on bank lending.
This significant move, made to ensure refineries don't go broke or suffer cash flow crises from being unable to recover their higher crude costs from higher product prices, will be watched closely around the world to see if there is any after shocks.
European countries and the US are growing increasingly concerned at the price pressures coming from the surging oil price.
The Federal Reserve referred to 'recent' energy price moves in its statement after the rate cut, putting inflation back in the picture.
The Chinese move will add to those concerns because there are rising fears in the US, Europe and Australia that the great period of falling product prices because of cheap Chinese products, is ending and that China is starting to 'export inflation' in the form of rising product costs.
The US and China have already called on Organisation of the Petroleum Exporting Countries to boost oil supplies to help build stocks ahead of the winter peak season.
The price of petrol, diesel and jet fuel in would be raised by Rmb500 per tonne, effective from yesterday, said the National Development and Reform Commission, China's central planner.
Meanwhile China isn't the only country with a problem caused by the crunch of the surging oil price, local politics and state controls
The Taiwanese government is facing the same sort of problem China is.
The state-owned oil refinery, CPC Corp, which controls the island's oil and gas market, is due to raise prices today, to match the surge in world crude prices, but has run into a domestic political brawl that is festering ahead of parliamentary elections.
Like Chinese's domestic refiners, CPC needs to lift product prices to recover higher crude costs but to be prevented from doing so would threaten cash flow and force the company to ask the Government for a hand out, something that also has political ramifications.
But a group of parliamentarians, seeking to improve their chances in the January poll, have tried for the third time in a year, to bring in a price freeze on oil products.
The Taiwanese government allowed CPC in July 2006 to adopt a floating price mechanism with weekly adjustments but even that was changed in September to allow only monthly price re-sets, and a possible freeze if the price change totals 15% or more in any month.
Brokers say other Asian countries such as South Korea and Thailand have liberalised their price control regimes: in Thailand only the price of LPG gas is controlled and subsidised. South Korea has an open market, and Indonesia and Malaysia have made changes, but the price of LPG and diesel and petrol is very sensitive and now under strain.
