Dear Fellow Investor,

Chinese consumers have only been paying $2.80 for a gallon for gas.

Are you shocked? Considering that here in the U.S. we've been paying over $3 a gallon all year, and the national average at the pump right now is around $4.09, I wouldn't be surprised if you were.

But if you're a long-time reader, then you probably already know that the Chinese government has always set a fixed price for gasoline to subsidize the economy. And this is not an uncommon occurrence in developing economies. Take Mexico, for instance. Gasoline prices are still under $3 a gallon in Mexico, and that's why many drivers from San Diego cross the border to fill up their tank.

These set prices, though, have had an adverse effect on the two state-owned enterprises (SOEs) that dominate oil processing in China -- Sinopec and PetroChina. Both companies had to buy oil at high market prices and operate their refineries at a loss.

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And while the Chinese government started to move towards deregulating the energy market to allow prices to track world prices more closely, last year it became apparent that this trend wasn't likely to continue. China continued to impose price control in the energy sector as an attempt to curb inflation.

Surge Leads to Oil Price Increase

Well after a 40% surge in crude oil prices this year, many other emerging countries with state subsidized gasoline prices were forced to lift prices -- Asian countries such as India, Taiwan, Indonesia and Malaysia all increased gasoline prices.

And today China followed suit.

The Chinese government announced today that it is raising fuel prices -- gasoline, diesel fuel, aviation kerosene and electricity -- in the country. Starting on June 20, prices of gasoline and diesel prices will be lifted 16% and 18% respectively.

This increase in fuel prices will alleviate the gasoline and diesel fuel shortage problem that is developing in China. So money-losing oil refiners will now have more incentive to produce gasoline again.

Now the immediate global impact of China lifting fuel prices sent the price of crude oil per barrel down almost $3 in trading today. Why? China is a strong driver of oil demand, which has helped push up oil prices over the past couple of years.

But don't expect this trend to last long.

The Chinese economy is still expected to grow at a rate of 9.8% in 2008 -- as reported by the World Bank today. So I don't expect to see any significant reductions in Chinese energy demand as a result of this price hike.

In the long run, energy prices will likely continue to move higher. And that's why I recommending that my China Strategy subscribers invest in an upstream oil company that benefits from higher oil prices. We already have more than a 160% gain in the company, and I expect even more profits as energy prices continue their trek higher.

Plus, in the July issue of China Strategy, I'll be recommending a pure play on rising oil prices. I don't want you to miss out on some of the best ways to profit from China's oil demand and rising oil prices. Join China Strategy today!

Robert Hsu