VZCZCXRO9969
RR RUEHCN RUEHVC
DE RUEHGH #0295 2130618
ZNR UUUUU ZZH
R 310618Z JUL 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7017
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHAAA/NSC WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 0339
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7587

UNCLAS SHANGHAI 000295 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EB/ESC AND OES/PCI 
TREASURY FOR AMB. HOLMER, WRIGHT, TSMITH, AND OASIA - DOHNER, HAARSAGER, CUSHMAN 
USDOC FOR ITA MAC DAS KASOFF, MELCHER, MCQUEEN 
NSC FOR WILDER AND TONG 
 
E.O. 12958: N/A 
TAGS: ENRG ECON ETTC EINV CH
SUBJECT: SHANGHAI ENERGY EXPERTS: FUEL SHORTAGES EXIST, BUT NOT IN 
SHANGHAI 
 
REF: Shanghai 284 
 
¶1.  (SBU) Summary. According to Shanghai energy experts, price 
controls are primarily to blame for gasoline and diesel 
shortages.  However, because Chinese oil companies control both 
up and downstream processes in fuel production, they can more 
easily cope with price controls then power generators.  Controls 
will likely continue until inflation decreases in the second 
half of 2008.  However, because of Shanghai's and other major 
East China cities' economic importance, it is unlikely that 
cities in East China will suffer from significant fuel 
shortages.  End Summary. 
 
Price Controls Responsible for Fuel Shortages 
--------------------------------------------- 
 
¶2. (SBU) Econoff met with local energy experts to discuss power 
and fuel issues in East China.  See reftel for a report on coal 
issues.  Interlocutors pointed to price controls as the primary 
source of fuel shortages.  Without an effective pricing 
mechanism, the market is not able to find its equilibrium, 
resulting in over demand and under supply.  A McKinsey 
consultant on July 15 observed that unlike China's fragmented 
power sector, China's oil companies control both up and 
downstream processes in fuel production.  Controlling both 
upstream and downstream production allows them to more easily 
cope with price controls, using upstream profits to offset 
downstream costs he noted.  Oil companies have therefore found 
it easier to cope with price controls than power generators.  A 
BHP Billiton energy analyst in a meeting on July 15 added that 
if the consumer price index (CPI) lowers during the second half 
of 2008 as many expect, the government will have more room to 
bring fuel prices closer to their market value. 
 
¶3.  (SBU) During a meeting on June 17 Utility and Machinery 
Sector Researcher Manop Sangiambut of CSLA added that the 
government is mandating more crude oil be refined into gasoline 
and diesel.  He noted Sinopec was recently ordered to limit 
production of petrochemicals.  He explained that oil refiners, 
unless mandated to do otherwise, often stop refining gasoline in 
favor of other products whose price is not controlled. 
Historically this has led to overproduction of petrochemicals, 
commonly used to make fertilizers, and underproduction of 
gasoline and diesel. 
 
East China Cities Will Not Face Shortages 
----------------------------------------- 
 
¶4.  (SBU) Interlocutors are optimistic, however, that fuel 
supplies in Shanghai and other major cities in East China will 
be sufficient.  Shanghai Economic Commission Deputy Director of 
Economic Operation Department Wu Jin Cheng in a meeting on June 
18th noted that Shanghai has two major refining facilities with 
enough capacity to meet the city's demand.  The central 
government directs crude oil imports and keeps the refineries 
well supplied, while major oil companies (Sinopec and 
Petrochina) determine how much to refine.  Interlocutors noted 
because Shanghai and other East China cities are major economic 
and commercial centers, the government ensures they have a 
steady fuel supply, placing the fuel shortage burden on other 
parts of China. 
 
JARRETT