GASOLINE at a record 8 yuan per liter, or about US$4.80 a gallon, may not be the end of pain at the pump for Chinese motorists.

If crude oil continues to rise and consumer prices maintain a more stable course, the Chinese government could raise fuel prices more frequently this year, analysts said, following Tuesday's larger-than-expected 6 percent to 7 percent increase in the price of gasoline.

For a long time, amid a government focus on spiraling inflation, Chinese oil companies have been forced to sell fuel products at below cost. In particular, for Sinopec Corp, Asia's largest refiner, domestic refining has turned into a value-destructive business the past decade.

The government in late 2008 announced a market-oriented pricing formula that allowed domestic fuel prices to be adjusted if the 22-day moving average of a basket of global crude rates changed more than 4 percent. More often than not, the formula has been sidestepped. That was especially true last year, when two price hikes and one reduction were announced. As crude prices surged, China's refining industry suffered heavy losses under the government's anti-inflation measures.

The Consumer Price Index, the main gauge of inflation, exceeded the government's 4 percent annual target every month last year.

Price reform to advance

However, top leaders seem to be more determined this year to advance plans for energy pricing reform. They set a higher-than-expected 4 percent inflation target that analysts said leave room for more increases in energy and utility prices. Inflation pressure has moderated in recent months, with consumer prices increasing a tamer 3.2 percent in February.

"We believe China's monetary policies will steadily loosen, potentially leading to more price increases for domestic refined products," said Gordon Kwan, head of regional energy research at Mirae Asset Securities, after Tuesday's price adjustment sent domestic pump rates to record highs.

In Shanghai, the ceiling retail price for the widely used 93-octane gasoline is now 8.27 yuan per liter, up from 7.79 yuan - an appreciation dubbed by local media as the official entry of the "8 era." Eight is supposed to be a lucky number in China, but motorists aren't feeling very lucky when it comes to filling up their tanks. Shanghai's prices are among the highest in China because the fuels here are of higher quality to meet stricter emissions requirements.

At 8 yuan a liter, Chinese motorists are indeed paying much more than those in the US. According to the US Energy Information Administration, the US regular gasoline prices averaged US$3.87 a gallon as of Monday.

China's National Development and Reform Commission, which sets energy prices, has said the higher pump prices reflect higher taxes on fuel.

Gasoline is taxed at 1 yuan per liter under the nation's consumption tax and at 17 percent under the value-added tax. The consumption tax was introduced in late 2008 to replace road maintenance fees and other annual charges and some road tolls.

Lin Boqiang, a Xiamen University energy professor, suggested that the government remit or reduce the consumption tax to mitigate the potential impact of higher fuel prices on China's economy and consumers, though he admits it would be only a short-term solution.

The latest fuel-price rise, announced late Monday, had been expected after the recent spike in international crude prices caused by tensions surrounding key supplier Iran.

However, the size of the increase came as a surprise. It was the biggest in almost three years and caused long queues at gas stations across the country before the new price regime took effect at midnight.

The increase immediately sparked public criticism, as all price rises do.

Analysts said China's fuel pricing policies going forward will be more business-friendly to producers like Sinopec and rival PetroChina. Automobiles in China haven't reached the necessity status of cars in the US. In a gesture to low-income fuel users, Premier Wen Jiabao said on Monday that the government will subsidize farmers directly if fuel prices rise too fast.

Manageable effect

Australia & New Zealand Banking Group said in a report that the effect of the latest price hike on inflation will be manageable. Transport costs account for only 10 percent of China's CPI basket, so a 6 percent to 7 percent increase in fuel prices would potentially bump up CPI between 0.6 and 0.7 percentage point, and even that won't be immediate, the bank said.

Mirae's Kwan said the latest hike merely brings refining in China to break-even levels and at least another 5 percent increase, possibly in the summer, is needed for refiners to make reasonable profits.

Refining losses at Sinopec have been somewhat offset by strength in upstream exploration and production and by downstream petrochemical sales, he said. Still, annual earnings due out next week "will not likely impress," he added.

And despite the latest price increase, which followed an earlier one on February 8, first-quarter results are likely to be "unexciting," he said.

Jiang Jiemin, PetroChina's chairman, said earlier this month that his company's refining loss last year was larger than the 50 billion yuan expected as he pressed the government for a fuel price hike.

Kwan said Sinopec has done well to mitigate the firm's refining losses, more than its rival.

Despite a much higher refining throughput, Kwan estimated Sinopec's 2011 refining loss of 34 billion yuan will be much lower than PetroChina's 60 billion yuan. That is because Sinopec's refineries benefit from processing more cheaply imported crude, while PetroChina has had to process higher-priced crude from its own oil fields, he said.

PetroChina may unveil a "disappointing" 7 percent slide in 2011 net profit, he said, as losses from refining and natural gas imports posed stiff headwinds for earnings growth, despite a lucrative upstream oil and gas production business.

Sinopec reports 2011 results on Monday and first-quarter results in April. PetroChina's annual earnings are scheduled to be released on March 30.