Next year will bring a mixed bag of fortunes to mainland energy companies as stubbornly high oil and coal prices help upstream producers but added costs hit downstream power, refining and chemical producers. Beijing faces a tough balancing act as rising inflation, led by food prices, makes it unpalatable for the government to increase fuel and power prices, given social stability is a priority ahead of the Beijing Olympics. On the other hand, widespread fuel shortages and rationing caused by artificially suppressed fuel prices means the government is under pressure to raise prices. That would give grumbling state-controlled refiners incentives to expand production capacity to meet higher demand. Analysts have revised up their crude oil forecasts since a sharp spike in August and September caused by the weak US dollar and rising exploration costs, with most expecting prices to remain high next year. DBS Vickers Securities analyst Gideon Lo Wai-yip forecasts the average Brent crude oil benchmark price to rise to US$75 a barrel next year from an estimated US$71.50 this year. UBS head of Asian oil and gas research Thomas Wong said the investment bank increased its long-term oil price forecast last month to US$73 a barrel from US$50, with an estimate of US$74 for next year. Citigroup this month raised its Brent forecast for next year by US$10 to US$80 a barrel, and its long-term oil price forecast by US$15 to US$75. 'Oil prices will likely fall from current near-record levels next year on the back of a global economic slowdown, but the decline will not be steep since the Organisation of Petroleum Exporting Countries will cut output if the price falls a lot,' Mr Lo said. 'The fact that it did not lift production even at US$90 a barrel showed that it was very satisfied with the prevailing high prices.' He said that Beijing, under pressure to lift domestic fuel prices closer to international levels, might resort to a differentiated price-rise strategy. 'I think next year's oil price will remain high and so will the pressure on refiners,' he said. 'One way to raise fuel prices but keep poorer consumers from the full brunt will be to let gasoline and jet fuel prices go up faster than that of diesel.' The agriculture, fishing and forestry sectors are particularly heavy consumers of diesel, used in machinery and motor engines, while petrol is normally used by car owners and jet fuel increases are borne by people who can afford to fly. Analysts expect power prices to go up next year as well, with coal prices likely to rise about 8 per cent to 10 per cent, based on a range being negotiated this month. However, given inflation concerns, they said Beijing would probably delay any power tariff increase until inflation eased back from an 11-year high of 6.9 per cent seen last month. ABN Amro head of Asian utilities research Gary Chiu expected the central government to lift power prices by an average 3 per cent in the second quarter of next year. 'We believe only those Chinese power producers with strong capacity expansion plans and investments in coal businesses can bear the impact of higher coal prices and maintain strong earnings growth in the longer term,' he wrote in a research report. So far, most Hong Kong-listed mainland power producers have been able to stave off profit declines by rapidly building new plants to capitalise on strong power demand and raising fuel-consumption efficiency. But the story for oil refiners is different. Crude oil prices have soared faster than coal prices in the past four years, and efficiency gains by refiners are less than those of power producers as their output grows at a much slower pace. Beijing has therefore provided more policy support for oil firms than power companies. Because it is holding domestic fuel prices at below international levels, the government has been providing subsidies to refiners to compensate for some of their losses. The farming and fishing sectors also have been shielded from the full impact of price increases. Critics say the system has not done enough to promote conservation, and that it should lift price controls to let higher costs deter mainland citizens from energy-intensive consumption. That way, the government would not need to subsidise the refiners and could use the money saved to help more consumers, which was a more effective way to cut consumption, they argued. 'China has been keeping domestic fuel prices too low, which means it has been subsidising over-consumption,' said Beijing-based energy consultant Robert Blohm, citing chronic road congestion and pollution problems in major mainland cities as a symptom. 'It should let prices do their job [of inducing conservation] ... if it wants to help poor people, it should give them cash and they will use the money to buy something else [instead of energy-intensive things].' With sky-high oil prices, debates on whether to raise resource taxes and implement a fuel tax will continue next year. Finance Vice-Minister Zhu Zhigang recently stirred controversy by disclosing the ministry's proposal to slap a 10 per cent resource tax on oil firms' oil revenues, adding that the timing was ripe for a fuel-consumption tax. The price-based resource tax will help raise extra revenues for the government since the proposed level represents a more than tenfold rise from the existing volume-based tax. That would substantially dent oil firms' revenues. While the revenues can be used to subsidise consumers, it will reduce incentives for firms to produce oil on the mainland, even given that the nation's existing resource tax is considered low by international standards. As for the fuel tax, analysts said it would probably only come after the lifting of price controls, given both moves would be aimed at promoting conservation. 'If the fuel tax is launched before fuel prices are liberalised, it would draw criticism that the government is lining its pocket while the refiners are suffering losses,' Mr Lo said. The fuel tax, first mulled in the late 1990s, will replace an existing road maintenance tax that is imposed on car owners regardless of whether they use their cars. While major energy-related regulation such as price-setting and new project approvals are led by top economic planner, the National Development and Reform Commission, the possible establishment of a ministry of energy next year could raise efficiency in policy formulation and decision-making. A more specialised body could better co-ordinate regulatory efforts from various government departments with a say on energy matters, Mr Lo said.