Rapid Increase in Energy Consumption

China’s rapidly growing economy has significantly increased its demand for energy. In 2004, China was the world’s second largest consumer, and also the world’s fourth largest net importer, of crude oil. The total sales volume for diesel in China has also significantly increased from 38.4 million tons in 1995 to 110.2 million tons in 2005, representing a compound annual growth rate of approximately 11%. In 2005 China was one of the world’s largest diesel consumers.

Amid strong demand for energy from around the globe and the fear of a shortage of supply, the price of crude oil experienced a 73.8% increase from US$40.24 (equivalent to approximately RMB321.74) per barrel on January 1, 2005 to US$75.81 (equivalent to approximately RMB606.14) per barrel on August 11, 2006, and reached a historical high of US$78.63 (equivalent to approximately RMB628.69) on August 7, 2006. In the meantime, the guidance price of conventional diesel in China increased from RMB2,385 per ton in December 2002 to RMB5,165 per ton in July 2006. However, compared to the retail diesel price in the United States, which was approximately RMB7,182 per ton in July 2006, the guidance price of conventional diesel in China was still at a significant discount. Historically, to stabilize domestic energy prices, the PRC government has provided subsidies to oil refineries in order to support and maintain prices of conventional diesel at a relatively lower level. However, with the recent upward adjustments of the guidance price, the retail price of conventional diesel in China has moved towards a direction that is more in line with international diesel price trends.

The total sales volume of diesel in China increased from 38.4 million tons in 2005 to 110.2 million tons in 2005. China is currently a net importer of crude oil. Crude oil is the main product used to produce conventional diesel. Part of the imported crude oil in China is used to produce diesel in order to meet domestic demand. By 2004, China’s net imports of crude oil and diesel amounted to 134.1 million tons.

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