This year's oil shortage was reminiscent of the previous one in 2005. Cargo drivers drove gingerly with half-full tanks, diesel generators sat silently waiting for oil that wasn't there, and many taxis even stopped running because of the shortage.

This time the oil shortage, which first started in southern cities like Guangzhou and Shenzhen in August, spread to northern cities like Zhengzhou and Taiyuan in November.

The China National Petroleum Corp. (PetroChina), the country's largest oil producer, transferred over 100,000 tons of diesel oil to the south before the end of November. Though the shortage has subsided to some extent, people are still haunted by its nightmares. Bosses at some gas stations still complain about the restrained oil supply.

Systemic problems

When the 2005 oil shortage occurred, many experts pointed a finger at the refined oil system in China-the domestic retail price was lower than the cost, and the oil price was determined by the government.

This year, many experts hold the same opinion.

According to the refined oil pricing mechanism, the National Development and Reform Commission (NDRC) decides the benchmark prices and retailers can float prices by up to 8 percent of the benchmarks.

The link between domestic and international oil prices is mostly irrelevant. The government fears that soaring international oil prices will cause social turmoil, which is why the NDRC sets domestic oil prices far lower than international prices. As a result, even though international oil prices are rising significantly, domestic prices are kept at an artificially low level.

"The aftermath of such a system is that most of the domestic refineries choose to sell their oil on the international market rather than support domestic needs," said Yu Hui, a researcher with the Chinese Academy of Social Sciences.

Statistics from the General Administra-tion of Customs show that refined oil exports grew 27.6 percent in the first half of this year, while refined oil imports decreased 1 percent year on year. The most recent shortage problem has not changed the situation. Latest customs statistics show that refined oil exports rose 30.4 percent in the first 10 months, while imports fell 8.9 percent year on year.

Some refineries, which depend heavily on imported crude oil, suspended production or reduced output due to higher international oil prices. The Statistics Bureau of Shaanxi Province revealed that after October, the amount of oil being processed dropped significantly and monthly output was about 300,000 tons, half of what it was last year. In 2005, while the rest of the country faced an oil crisis, Shaanxi was hardly affected. This time it was a different story.

On August 10, the Oil Market Report published by the International Energy Agency predicted that China would face an oil crisis due to the special pricing mechanism.

Yu said that another consequence of low domestic oil prices was an increased demand for energy. "Since the oil price is low, many people are more willing to drive, leading to a rapid increase in the number of automobiles," Yu said.

Yu said that at the end of 2005, the number of vehicles owned by Beijing residents was 2.58 million, 71.1 percent higher than in 2000. Many people have been buying cars that guzzle oil and gas, adding more pressure to the oil supply. Yu estimated that by 2020, there will be 130 million to 150 million cars in China, and these will need 300 million tons of oil.

Yu also pointed out that half of China's oil supply depends on imports and oil consumption will reach 500 million tons by 2020.

"It is no wonder why this oil crisis has occurred," Yu said. "Our oil prices are much lower than what it is in Japan and Europe. Why can't the government raise the oil prices to curb rapid oil consumption?" Yu believes it is crucial for the country to suppress oil consumption by using economic and market leverages. Meanwhile, he said, the government should shoulder more responsibility for educating people about how to conserve oil.

China had been waiting for an appropriate time to link domestic oil prices to international prices through moderate readjustments. On November 1, the NDRC approved the raising of gasoline and diesel oil wholesale prices by 500 yuan per ton.

But the problem is that international oil prices continue to rise and these small readjustments have had little impact. "Before the adjustment, the refineries lost $10 if they processed one barrel of crude oil," said Yu. "After the adjustment, they still lost $5 for one barrel."

Economic impacts

Although the oil shortage was not as serious this time as it was in 2005, some companies have already felt the pressure.

Dou Erxiang, a researcher with Peking University, said that the electricity, automobile, glass, chemical and transportation industries were hit hardest by the crisis.

Meanwhile, the crisis will likely force the government to raise oil prices further. Rising oil prices mean more expenditure of foreign reserves, the reduction of net exports, a lower gross domestic product (GDP) growth rate and higher consumer prices. Furthermore, the cost of products based on oil will rise considerably and their competitiveness in the market will fall.

Oil is referred to as the "blood" of the economy and few industries can survive without it. Oil price fluctuations and changing supply and demand quantities will penetrate all aspects of living and production. Even though definite figures about the influence of higher oil prices are hard to tally, the end fact of its influence cannot be neglected.

Yu believes the oil crisis will not affect the overall performance of China's GDP. But if oil shortages become a normal phenomenon, the Chinese economy will be damaged severely.

Dou said that the impacts of the oil shortage are not all negative. Energy-consuming industries will be replaced by energy-efficient ones, he said, and products with higher efficiency and low energy cost will become better sellers in the market.

Learning to cope

Chinese Premier Wen Jiabao said on November 21 that the government would take two measures to solve the oil problem. First, more channels will be opened for crude oil supply and refined oil supply, especially diesel oil. Second, the production capacity and output of crude oil and refined oil will be raised.

The two oil giants in China, PetroChina and China Petroleum and Chemical Corp. (Sinopec) issued emergency notices to subsidiaries that they must fulfill the refined oil demand for the domestic market.

PetroChina ordered its refineries to produce as much as they could. It planned to process 32.25 million tons of crude oil in the fourth quarter, up 7.1 percent year on year. PetroChina vowed to import more refined oil to serve the petroleum needs in the eastern and southern parts of the country.

Sinopec ordered its subsidiary refineries to organize production according to the planned schedule and vowed to guarantee 42 million tons of oil in the fourth quarter. Sinopec imported 277,000 tons of refined oil in November and suffered huge losses because of this. It will import 200,000 tons of diesel oil in December, double the planned figure.

At the same time they increase output and imports, the two giants stated publicly that they had suspended refined oil exports.

The Ministry of Commerce also issued a notice on November 20, ordering all cities create oil emergency systems and governors must retain stability between supply and demand. PetroChina and Sinopec were required to restrict exports and increase refined oil imports to maintain a healthy market order.

"Those measures will help ease the tension," said Dong Xiucheng, Deputy Dean of School of Business Administration of China University of Petroleum. But Dong argued that the current pricing mechanism must be changed if the government is to settle the oil crisis once and for all and that market itself must be able to play its role.