There's Nothing Refined About Sinopec's Results

These are boom times for energy producers and tight times for refiners, but for integrated energy giants it's a whole lot of both.

Nowhere is that more evident than in China, where government-mandated price caps on fuel products have literally torched the once-formidable earnings of China's integrated energy conglomerates. China Petroleum and Chemical (NYSE: SNP) -- better known as Sinopec -- issued earnings results for the first half of 2008 that show refining oil is a losing proposition under this managed price structure. Sinopec's bottom line took a 77% nosedive from the first half of 2007.

Management expects continued high oil prices and pressure on the refining business for the remainder of 2008. Still, Sinopec and rival PetroChina (NYSE: PTR) may see some relief in the second half from a fuel price hike issued in China in June, and it wouldn't be a shock to see the Chinese government continue to lighten energy subsidies.

Zooming out, Sinopec reports that GDP in China rose 10.4% in the first half, and domestic consumption of refined oil rose 13.9%. For Fools who remain long commodities despite the recent sell-off, this provides welcome confirmation that a key source of global demand growth remains intact.

I have tracked the tribulations of U.S. refiners like Valero (NYSE: VLO) and Tesoro (NYSE: TSO) in their struggle to maintain profitability through a very difficult operating environment. Meanwhile, my Foolish colleague David Lee Smith has followed the burden from refining on the results of global energy leaders like ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP). As long as shares of sour crude specialists like Valero or big-hitters like ExxonMobil are available in a world free from price controls, there's no way I'm seeking exposure to refining inside the Great Wall of China anytime soon.