[Rhodes22-list] I told you so! Economics!

[Brad Haslett]

Full disclosure policy - I don't own oil stocks other than what's in my
mutual funds.  Last night I reminded Fan of my backing off from the $6000
difference of what was my inflated offering price on an Illinois Basin
productive oil well lease and the sellers last offer in 2004.  I don't have
a crystal ball but saw this coming a long time ago. Insight means nothing
without guts.  Comments to follow -

China fuel crisis spreads

By Jim Bai and Rujun Shen*Wed Oct 31, 5:21 AM ET*

China's worst fuel crisis in two years spread to the capital and other
inland areas by Wednesday, and one man was killed in a brawl at a petrol
station queue, upping pressure on the government to intervene.

Diesel shortages in China's political heart, which escaped previous supply
crunches unscathed, highlight tensions between the government and its
increasingly independent oil firms about who should pay for the country's
generous fuel subsidies.

Top refiner Sinopec on Wednesday pledged more supplies and bought additional
diesel fuel abroad, but it may fall to Beijing to end the stand-off by
raising domestic prices, easing taxes, promising another year-end pay-off --
or simply strong-arming suppliers into selling more fuel at a loss.

"Sinopec will work hard to resolve the diesel supply tightness," a headline
in the company paper announced. Even so, at least five of its Beijing
stations were rationing supplies.

At stake are profits for oil majors Sinopec and PetroChina from selling
motor fuel in the world's second-largest consumer, where pump prices have
not been raised in 17 months even as crude costs hit a series of record
highs.

In scenes reminiscent of the weeks-long shortages in summer 2005, also
caused by the yawning gap between domestic prices and global crude costs,
petrol stations across the country were turning away trucks and rationing
supplies.

After striking the southeastern coastal provinces and the financial hub of
Shanghai, they are now hitting the interior, managers and local media say.

In Hefei, the capital of eastern Anhui province, independent suppliers had
almost all run out of diesel and several controlled by the oil majors were
rationing supplies, station workers said.

"We don't have diesel today. Supply has been quite spotty. Long lines in
front of gas stations are very common these days in Hefei," a manager
surnamed Yang told Reuters by telephone.

A man was killed in fuel-strapped Henan during a brawl over queue jumping at
a service station, police said. Parts of Hunan and Hubei provinces also face
shortages, media reports said.

SOCIETY VERSUS MARKET

Beijing worries that more costly energy could push up already-high inflation
or spark unrest, and effectively forces its refiners and retailers to
subsidize state-set prices.

Diesel costs about 64 cents a liter at the pump in Beijing, versus around $1
in Singapore and $2 in Britain.

But a recent rally in global crude prices to above $90 a barrel has deepened
large firms' losses and made them ever more reluctant to keep markets
supplied.

A source at PetroChina said the company would lose 1,500 yuan ($200) a tonne
by selling imported diesel at Chinese pumps.

"The crux of the problem is the state-owned enterprises... you see the
remaining contradictions of the state sector in the market economy," said
Joseph Yu-shek Cheng, political science professor at the City University of
Hong Kong.

"On the one hand they understand that they have to assume certain political
responsibilities, but at the same time they have to look after their own
company interests."

Underlining the key role of pricing in the shortage, shipping companies in
badly hit Zhejiang province said they had no problem securing supplies if
they were willing to pay above-market prices to independent traders.

After China's last major fuel crisis in summer 2005, when queues stretched
for hours, Beijing cracked down heavily on a flow of exports that firms were
using to ease their bottom lines, rescinding tax breaks, among other things.


But this time round, with diesel exports just a tiny fraction of
consumption, the shortages may be more difficult to solve without direct
subsidies, price liberalization -- or a more overt political crackdown on
the recalcitrant refiners.

SILENT PROTEST

With current retail prices most plants only break even when crude is around
$65 a barrel or lower, so soaring markets have forced many independents out
of the market. The burden of making up the difference has fallen on the
state-owned companies.

Sinopec has raised imports and refining in November, and analysts expect it
will get another tranche of cash from the government at the end of this year
to offset its losses. Beijing gave it $1.2 billion in 2005 and $640 million
in 2006.

An industry source said Sinopec had bought another 30,000 tonnes of diesel
for import in November to the hardest-hit southeastern coastal areas. And it
will boost refinery runs by 800,000 tonnes next month, a company paper said.


But a Sinopec official told Reuters on Tuesday that its largest refinery
will switch off a crude unit in November and process 3 percent less crude
than the previous month, sending a signal to Beijing in a move that could
worsen the shortage.

"It's ridiculous to shut down plants at a time of razor-thin supply," one
source remarked. "I guess it's a silent protest for the central government
to raise pump prices."

(Additional reporting by Felicia Loo in Singapore and Langi Jiang in
Beijing)

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We'll see social upheaval in this country as well.  We have a 100 year
history of entitlement thinking regarding crude oil. "Hubberts Peak" is no
longer a theory.  Feel good about yourselves, fellow Rhodies, you sail!
This too shall pass but it will be an ugly transition.
Brad