ANALYSIS - Oil rally complicates China fuel pricing

By Eadie Chen and Chen Aizhu

BEIJING (Reuters) - China's latest fuel price rise may be its last easy fuel pricing decision for a while.

Under a pricing regime that links retail fuel prices to the the global cost of crude, the government upped pump prices for gasoline and diesel by about 7 percent from Tuesday, taking them to the highest ever.

But the system's clarity, the main reason for its introduction at the start of the year, only operates when crude is below $80 a barrel, a level the global benchmark is bumping up against.

Above this, and fuel price decisions increasingly become mired in politics, as the government tries to steer between "too low" -- when refineries decide producing gasoline and diesel is not worth it, and "too high" -- when economic growth starts to gag on the price of a fill-up at the pump.

The problem is that the pricing guidelines, set out a year ago by the National Development and Reform Commission (NDRC), don't spell out how refinery margins will change above $80 a barrel, only that "normal" margins won't be guaranteed.

How much pressure should the government put on prices? How much pain should refiners be expected to take? How much help is needed for the economy, which is expected to grow by more than 8 percent this year and is churning out record numbers of cars?

The stakes are high for top Asian oil refiner Sinopec and Asia's top oil and gas producer PetroChina, which still made refining losses last year even with combined a government subsidy of 66 billion yuan ($9.67 billion).

At the State Information Center, a key think-tank attached to the NDRC, senior researcher Niu Li is in no doubt as to what should be done.