Sinopec Profits Drop on Fuel Subsidy

Fuel prices in China are set by a 22 day moving average of the various prices for a barrel of oil that exist out there.  The guts of the calculation is immaterial but the principle is what is important.  First PetroChina (NYSE:PTR) and now their refinery-heavy subsidiary Sinopec (NYSE:SNP) have posted massive losses in their refining divisions because of this price control in their 2nd quarter earnings.

Sinopec’s net income fell 41% to $3.9 billion US, year over year because of losses on refining.  On 811 million barrels of oil Sinopec lost ¥18.5 billion or $2.9 billion US.  Compared to PetroChina, however, Sinopec is a model of efficiency.  They posted earlier in this earnings season a loss of ¥23.3 billion on just 489.7 million barrels.

At this point it’s silly to get into an argument about whose system of price controls is better, the U.S. or China, because both of them engage in it, albeit in very different ways.  The anti-dumping tariffs that the U.S. has been imposing on everything from Chinese solar panels to Vietnamese shrimp are just one of the ways that the U.S. is pushing for a full-blown trade war with Southeast Asia.

Unlike the U.S., however, in the short to medium term China can afford to subsidize oil and gas usage because they are still running a trade surplus, much the same way the U.S. did for generations.  Today the volatility in the Brent Crude (AMEX:BNO) market is due almost entirely to U.S. monetary and foreign policy decisions that stem from attempting to keep China’s access to Middle Eastern and Central Asian crude at a minimum.

For how much longer can that policy persist?

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Tom Luongo

About Tom Luongo

Tom Luongo is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.

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