China to hike energy prices

China said Thursday that it would raise fuel and electricity prices, a move that could add to the nation’s already high inflation rate but cut consumer demand and thus help lower global crude oil prices.

China, which has been keeping fuel costs for consumers below market rates with billions of dollars in subsidies, said retail gasoline prices as of today would rise more than 16% and diesel prices would jump 18%. Many analysts have criticized the subsidies, saying they distorted the market and discouraged consumers and industries from conserving energy.

The announcement, made through the official New China News Agency, appeared to have an immediate effect in global markets, as crude prices for July delivery fell $4.75, or 3.5%, to settle at $131.93 a barrel in New York futures trading.

“It caught the market by surprise because most people didn’t think that China would do anything about their subsidies until after the Olympics,” said Phil Flynn, an analyst at Alaron Trading in Chicago. “What makes it even more amazing is the market was up because of events in Nigeria. . . . When the China thing came out, that definitely took a back seat.”

Early in the day, the price of oil was ticking higher on fears over production in Nigeria, where an attack from militants forced Royal Dutch Shell to shut down production at an offshore rig, Flynn said. Sabotage of oil operations has become common in Nigeria. But this assault was unusual because the target was more than 75 miles offshore.

China is the world’s second-largest consumer of oil, well behind the United States, but the Asian nation’s demand and imports of crude have been growing briskly in recent years to support its booming economy and the rising standard of living among its 1.3 billion people. Analysts have said burgeoning consumption in China, India and other developing countries has contributed to the doubling of oil prices in the last 12 months.

The increase in China’s retail pump prices -- to about $3.05 per gallon for gas and $3.31 for diesel -- is expected to reduce consumption.

“Once they start paying for it, they’ll slow down” their fuel use, said Fadel Gheit, oil analyst at Oppenheimer & Co.

He said nearly 60% of the world’s oil demand growth stemmed from China’s subsidized consumption. Cutting price protections there, he said, means “demand will come down very sharply.”

That could let some air out of the frenzied oil market.

“I think this ride is about to end,” Gheit said of the feverish rise in prices. “Everybody who is paying the true price of oil is using less . . . and the demand outlook has been weakening over the last six months.”

China last raised retail fuel prices in November, by about 9%, and analysts and consumers had expected the government to lift prices again. Most people thought the increase would come after the Beijing Olympics in August because the government might not want to risk upsetting the populace by adding to higher consumer prices.

“It will definitely push up inflation, but the government had to adjust it because it faced too much pressure,” said He Jun, an oil analyst at Beijing Anbound Consulting Co. “The demand-and-supply system was too distorted.”

Although China’s refined oil prices have been low, the market faced a supply crunch because people were hoarding fuel in anticipation of a price hike. That was exacerbated by a reluctance among the big state-owned oil companies to sell at huge losses because they had to buy oil at global market rates but sell fuel to consumers at artificially low prices.

China’s top two oil companies, which produce and refine oil, have sustained heavy losses, contributing to recent declines in China’s plummeting stock market.

Mei Xinyu, a researcher with China’s Ministry of Commerce, said distorted prices encouraged people to waste fuel. Even though sport utility vehicle sales in Western countries have been falling sharply, he said, they have continued to rise in China. More than half of the imported vehicles in the first quarter were SUVs, he said.

“There’s still a long way to go up,” he said of China’s retail fuel prices. “But this shows the future trend.”

Mei noted that the move to raise prices followed news that China’s year-over-year inflation rate edged down to 7.7% in May from 8.5% in April. He also noted that Beijing’s action came a day after the U.S. and China concluded economic talks outside Washington, suggesting that Chinese officials may have been responding to calls from the U.S. to expose more of their economy to market forces.

Chinese consumers and businesses have been bracing for the higher pump prices.

“It’s quite big,” said Sun Aihuai, manager of Hongjian Logistics Co. in Dongguan in China’s industrial southeast. Sun, who operates two 2-ton trucks, said he would probably raise his prices.

Still, he said that the fuel price increase was “acceptable,” given that he recently has been forced to wait as long as two hours to fill up at jammed service stations. Sometimes, he said, he had little choice but to buy diesel on the black market at prices 30% above retail levels.

In addition to raising gas and diesel prices, the National Development and Reform Commission, China’s top economic planner, said it would lift prices of aviation kerosene and electricity. The prices of natural gas and liquefied petroleum gas would be left unchanged, the commission said.

The commission said more subsidies would be offered to farmers, low-income families and taxi drivers to cushion the effect of price increases.

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don.lee@latimes.com

Cao Jun in The Times’ Shanghai bureau and Times staff writer Elizabeth Douglass in San Diego contributed to this report.