Affected by the quantitative easing policy by the U.S. Federal Reserve, international oil prices have been increasing quickly, Zhong said. The higher wholesale prices compared to retail prices reflect business expectations for price increases in the future, so possibilities cannot be ruled out that diesel oil stockpiling won't soon ensue.

Addressing the shortage

To solve the problem of suspended or limited diesel supplies by gas stations, expectations on future price increases need to be relaxed, Zhong said. If, after raising the retail prices of refined oil on October 26, the government will raise the oil prices again in late November, the two oil giants may have more incentive to increase oil supplies.

This will prove to be a major challenge to consider for related decision-making departments. If they follow through with crude oil price fluctuations and raise refined oil prices again, consumers will complain and the government will fear repercussions from the general public. But if they try to control the price, the oil shortage will not be stifled.

Chen Kexin, chief analyst of the Distribution Productivity Promotion Center for China Commerce, thinks it is impossible to thoroughly solve the oil shortage anytime soon. Under the general conditions of short supply, together with the unpredictable U.S. dollar, prices of energy products such as diesel oil will most probably increase in the future. To the worldwide short supply and rising prices of energy products, China must make long-term preparations.

Chen said since China is undergoing massive industrialization, urbanization and infrastructure construction, diesel oil and all other energy products will be in high demand. This high demand will not decrease in the short term and may actually continue for decades to come.

To relieve diesel oil supply strains, the government should first rationalize the wholesale and retail prices of diesel oil, and then open the wholesale and retail sector of refined oil and break any monopolies, Chen said. It should also increase imports of diesel oil while curbing exports. More importantly, the government should encourage energy saving and eliminate backward production capacities. Cutting off electricity and stopping the flow of diesel oil and other resources to these companies would effectively cut off their lifeline and force them to shut down.

According to estimates by C1 Energy Ltd., the short supply of diesel oil may be relieved by the end of 2010. And due to increased transportation needs during the next Spring Festival in February 2011, the two oil giants, under pressure from the government and the public, will most likely relax their inventories to mitigate the oil shortage if only momentarily.

Fragile reserves

The frequent oil shortages in recent years reflect the fragility of the reserve system for refined oil in China. "At present, the strategic refined oil reserve is progressing slowly," said Mao Jiaxiang, Deputy Director of Sinopec's Economics and Development Research Institute.

Since 2003, China has been preparing oil reserve bases. The primary plan is to complete hardware facilities in three stages within 15 years. The reserves include 10-12 million tons in the first stage and 28 million tons in the second and third stages respectively. Facilities for the first stage are currently in use, consisting of four crude oil reserve bases with an aggregate reserve capacity of 10 million tons. But all the reserves would last only 30 days, whereas the internationally accepted security line is 90 days.

In a proposal for the petroleum and chemical industry released in May 2009, the State Council said for the first time that it would "act promptly to establish oil reserves, accelerate the construction of reserve facilities and increase national oil reserves by grasping the present favorable opportunities."

The target is to raise the refined oil reserve to 3 million tons in 2009, 6 million tons in 2010 and 10 million tons in 2015.

However, since the plan was somewhat vague, progress has been slow. And the target of 3 million tons for 2009 was not reached.

"Oil companies have no incentive to increase commercial reserves. To increase strategic reserves, the government must grant favorable policies and financial support," Mao said.

Besides financial problems, another reason for the slow progress in oil reserves is that refined oil is easy to volatilize and deteriorate, so the oil depots must change oil products at regular intervals, which increases companies' management difficulties.

Liao Kaishun, an oil industry analyst at C1 Energy Ltd., suggests that the government's future control of diesel oil exports should be under the precondition of strengthening the national strategic and commercial reserves of refined oil. In the meantime, refined oil reserves should be open not only to the two oil giants and state-owned enterprises, but also to more private enterprises, in order to diversify the storage of oil.