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China Examines Its Oil Pricing Strategy

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In a boon to refiners, Chinese gas prices rise short-term as the government looks for better ways to work with Chinese oil companies and domestic consumers.

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China raised fuel prices for the second time in a month last week, with a 6% hike in gasoline and a 6.5% hike in diesel fuel.

Retail gasoline prices at the pump were expected to rise to roughly the equivalent of $4.40 to $4.55 per gallon. The move was immediately seen as a boost to oil companies, which have experienced refining losses this year.

China Petroleum & Chemical (NYSE:SNP), or Sinopec-whose major business is refining-booked a $3 billion loss in its refining segment for the first half of this year. The same period the previous year saw a loss of about $2 billion.

Although Sinopec and other major oil companies in China-such as PetroChina (NYSE:PTR), which posted nearly a $5 billion refining loss-have remained overall profitable, the government's fuel-price controls have inhibited the companies' abilities to pass along input costs to end users.

The latest price increase would move fuel prices near their all-time high, which was reached in the early spring of this year. China's government had been keeping the price down as a way of avoiding pressuring consumers economically, as fuel and food costs are a major part of consumer expenses. Beginning in late spring, the government cut fuel prices, and did so two more times by July.

Demand recently, however, has reached an almost two-year low, led downward by lower industrial demand due to the slowing economy. But the fuel-price increase may further push down consumer demand at the retail end for gasoline at the pump.

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