Omelet Redefines Hollywood Filmmaking

LA Agency Raises the Bar by Creating the Ultimate Video Relay
Campaign for Microsoft - Tapping into the Pulse of the Hollywood and
                         Online Communities
LOS ANGELES--(Business Wire)--
Today Omelet, a hybrid advertising, entertainment, marketing
agency that merges creativity, strategy and seamless execution,
announced its role in the creation of an experience-based marketing
and advertising campaign - The Ultimate Video Relay
(www.ultimatevideorelay.com - UVR). The program is specifically
designed to the online community to do what it does best - find new
talent.

  Developed along side Microsoft's Windows Vista Ultimate team, UVR
allows amateur filmmakers the opportunity to use their PC's to
showcase their work by submitting scripts to be judged by peers for
their chance to help complete a short film. The campaign will progress
in three acts or relays - ultimately culminating with the discovery of
the next Hollywood 'it' filmmaker.

  "Inviting customers to experience the benefits of Windows Vista
Ultimate and 'Ultimate PCs' is an infinitely more powerful influence
vehicle than building a web site that explains to them the benefits
through pictures and prose," said Barry Goffe, Director of Product
Management for Windows Vista, Microsoft Corporation. "In helping us
bring the Ultimate Video Relay to life, Omelet has established a new
industry standard for creativity through the execution of experiential
marketing programs."

  The contest is inspired by a five-minute short film titled "The
Cube" that was written and directed by Kyle Newman, an up-and-coming
Hollywood talent and director of the highly anticipated feature film
"Fanboys."

  "Consumers are busier than ever; therefore, brand specific
advertising must merge into the everyday lives of its target customer
in a non-intrusive and useful manner," said Shervin Samari, partner,
Omelet. "With this in mind, Omelet developed this campaign to address
Microsoft's need to broaden consumers understanding of the value and
use of the Windows Vista Ultimate operating system."

  The Ultimate Video Relay contest is broken down into three acts,
each requiring a script or video submission and voting process. Act I
kicks off with award-winning director Kyle Newman, developing the
foundation with the first third of the short film. Then registered
filmmakers can submit their scripts, picking up where Kyle's first act
left off. Kyle and the online community will vote on these scripts and
the top five will move on to Act II.

  Those who move into Act II will be provided all the tools needed
to turn their winning scripts into films, including cameras, Falcon
laptops and Pinnacle editing software. Once those videos are unveiled
on UVR's site the community will again vote.

  Act III works exactly like the previous acts, but it is the
culmination of the relay and focuses on the best finale to the short.
At the conclusion of Act III videos will be voted on and the ultimate
filmmaker chosen.

  The site was jointly developed by Omelet, TriggerStreet.com and
sponsored by Microsoft. For official rules, visit
www.ultimatevideorelay.com. On Tuesday, June 3 script voting for Act I
opens to registered users.

  About Omelet

  OMELET is a Los Angeles based full-service branding, advertising
and entertainment big ideas company comprised of egoless creative
entrepreneurs. Omelet specializes in creating "Marketing Formats" that
deliver organic media-neutral creative solutions designed to solve a
brand's core business challenge. At the forefront of the ever-evolving
marketing landscape, Omelet is helping to redefine how brands and
entertainment co-exist. Omelet has worked with a variety of clients
including ABC, Activision, Anheuser-Busch, Amstel Light, Bioware, The
Coffee Bean & Tea Leaf, EA, Easton Sports, Fox Mobile Entertainment,
Fox TV Studios, G4 Network, Moretti Beer, Microsoft, NBC "Green is
Universal," Outfest, Pandemic, Paulaner Beer, Toyota Matrix, USA
Networks, Vivendi Games Mobile, and Vivendi Games.

Intersect Communications
Michelle Van Jura, 646-781-9323
mvj@intersectcom.com

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Copyright Business Wire 2008

The hidden costs of fuel subsidies

HONG KONG: Buckling under the weight of record oil prices, several Asian countries have cut or are thinking of cutting their fuel subsidies, which raises a pressing question for Beijing: Can China afford its own oil subsidies at a time when it is spending billions on post-earthquake reconstruction?

The short answer is yes, because China is blessed with both large trade account and fiscal surpluses. The reconstruction cost is projected to amount to about 1 percent of China's gross domestic product, while the fuel subsidies account for another 1 percent, JPMorgan estimates.

Remember that China had a fiscal surplus of 0.7 percent of gross domestic product last year, or $174 billion. So even if spending on post-earthquake rebuilding and fuel subsidies were to cause a 1 percent fiscal deficit, that would still be very manageable.

But here is a more important question: Why should China keep domestic fuel prices at about half of the global average?

The usual answers are to keep inflation in check and stave off social instability that could result if prices were to rise too quickly.

But by distorting fuel prices, China is encouraging fuel consumption and discouraging the use of new energy. Since the Chinese still live in an $80-a-barrel oil environment, demand for anything from cars to chemical products will spiral higher and raise the risks of economic overheating.

Increasing subsidies on fuel will crowd out more investment in other areas, such as education or health care, to name two possibilities.

What's more, a worsening fiscal situation might put downward pressure on the yuan. Fuel subsidies have exaggerated inflation in the developed world, while understating inflation in the developing world. China's inflation could well hit 15 percent if Beijing were to free up caps on energy prices, Morgan Stanley estimates.

"If China is not able to take away the subsidy and cut down its demand, it will have huge implications for the world," said Shikha Jha, a senior economist at Asian Development Bank.

Countries like China and India, along with Gulf nations whose retail oil prices are kept below global prices, contributed 61 percent of the increase in global consumption of crude oil from 2000 to 2006, according to JPMorgan.

Other than Japan, Hong Kong, Singapore and South Korea, most Asian nations subsidize domestic fuel prices. The more countries subsidize them, the less likely high oil prices will have any affect in reducing overall demand, forcing governments in weaker financial situations to surrender first and stop their subsidies.

That is what happened over the past two weeks. Indonesia, Taiwan, Sri Lanka, Bangladesh, India and Malaysia have either raised regulated fuel prices or pledged that they will.

Actions taken by those countries will not be able to tame a rally in prices though unless China, the second-largest oil user in the world, changes its policy. While the West is critical of China's energy policy, there is little outcry for change within the country, except for complaints from two loss-making refineries.

By contrast, Indonesia has convinced its people that fuel subsidies benefit the rich more than the poor, because rich people drive more and consume more electricity. Jakarta rolled out a $1.5 billion cash subsidy program to help low-income Indonesians cope with higher prices. Although no country wants to build a system on subsidies, the cash subsidy at least makes fuel subsidy cuts politically feasible.

"The people need to wonder, who pays for the subsidies?" said Louis Vincent Gave, chief executive of GaveKal, a research and asset management company. "Most Asian countries are printing money to pay for them."

Fuel subsidies compromise countries' ability to control their own budget spending. If China and India can cut their subsidies, they would be able to spend more on infrastructure and education.

While Asian governments dole out cheap food and cheap energy, Asian currencies settle the bill. Morgan Stanley expects some emerging market currencies to face downward pressure, probably for the first time in a decade, as those countries unwind their fuel subsidies and domestic inflation shoots up.

China's domestic fuel prices are among the lowest in the world, equal to about 61 percent of prices in the United States, 41 percent of Japan and 28 percent of England. The longer it waits, the more painful it will be when it tries to remove the subsidy.

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S.D. county approves rezoning for new oil refinery

ELK POINT, S.D.—Voters in this mostly agricultural corner of the Midwest have approved a proposal to build the first new U.S. oil refinery in more than 30 years.

more stories like this

Union County residents voted 58 percent to 42 percent Tuesday to endorse the rezoning of almost 3,300 acres of pristine farm land north of Elk Point for the oil refinery.

Texas-based Hyperion Resources requested the rezoning for the $10 billion refinery, billed as a potential step toward national energy independence. The proposal has been a contentious issue in the southeast corner of South Dakota, with supporters citing economic development benefits and opponents voicing environmental and quality-of-life concerns.

The ballot measure garnered solid support in the southern part of Union County. Most rural precincts strongly rejected the rezoning, but they didn't have the population to overcome support in the county's largest towns.

Preston Phillips, a Hyperion Resources project executive, said he was ecstatic with the outcome.

"We'll continue to work with everyone in the county," he said. "We want to be a good corporate citizen. We want to be a good corporate neighbor."

Despite the approval of the rezoning, Phillips said Elk Point is not the only site being considered and that the site selection process would continue. "Any big project like this has to have options," he said.

Hyperion's next big hurdle is a lengthy air quality permit application being reviewed by the South Dakota Department of Environment and Natural Resources.

"It's going to be a long road before anything's done on it," project opponent Jason Quam said of the refinery.

Besides the permits, he said he doubted Hyperion could secure the financing for the refinery.

Quam, of the group Citizens Against Oil Pollution, said his organization was evaluating its next move.

Elk Point Mayor Isabel Trobaugh said the refinery would bring needed jobs to the county and that she didn't think it would harm the environment.

She said she talked to the mayors of Ponca City, Okla., and El Dorado, Kan. -- which both have oil refineries -- and they assured her their communities had clean air and water.

Hyperion has said the project, about 60 miles south of Sioux Falls, would create 1,800 permanent jobs and another 4,500 construction jobs over a four-year period. Construction could begin in 2010.

The Hyperion Energy Center would process 400,000 barrels of thick Canadian crude oil a day, which company executives say would help the U.S. reduce its dependence on overseas oil. The company has said it will bring in the crude oil by pipeline but has announced no specific plans for that transportation link.

Hyperion billed the facility as a "green refinery" and said it would produce ultra-low sulfur gasoline and diesel and rank among the cleanest and most environmentally friendly oil refineries in the world.

© Copyright 2008 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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Critics blame biofuel production for price rises and global hunger. Delegates struggle to reach a compromise at Rome meeting.

By Tracy Wilkinson, Los Angeles Times Staff Writer
June 5, 2008

ROME -- Outside the U.N. emergency summit on food here, protesters dressed as ears of corn. Inside, Bush administration officials Wednesday found themselves on the defensive on a wide range of U.S. policies, from biofuel production to genetic engineering and subsidies.

Delegates clashed during the second day of the three-day meeting over how much blame can be assigned to biofuels for the meteoric rise in food prices. The U.S. is an enthusiastic supporter of the robust and heavily subsidized biofuel industry, with plans to allocate about a quarter of its corn crop to the lucrative production of ethanol.

• 
  World leaders urged to address food crisis
• 
  Chart: Rising cost of food

• Mugabe presence at global hunger summit drops jaws
• Lawmakers turn up the heat on ethanol in response to rising food prices

But many other nations and numerous aid agencies contend that too much food is ending up in fuel tanks and not on dinner tables, deepening a threat of global starvation.

Agriculture Secretary Edward T. Schafer, leading the U.S. delegation, emerged from a series of side meetings and acknowledged that a struggle was underway to reach compromise language on the biofuels issue.

Drafts of a final summit declaration, circulating late Wednesday, reflected watered-down recommendations of "further studies" on biofuels, hardly viewed as a decisive position.

Finding consensus on biofuels, which are made from corn, sugar cane, palm oil and other foodstuffs, had been one of the goals outlined by United Nations Secretary General Ban Ki-moon in opening the summit here at the headquarters of the U.N.'s Food and Agriculture Organization, or FAO. Opponents and supporters diverge wildly on the pros and cons of biofuels and how harmful they may or may not be.

Schafer maintains that bumper U.S. crops provide plenty of corn for both eating and filling tanks. He says biofuels account for no more than 3% of the hike in prices of commodities, which in some cases have doubled in recent years.

Several U.N. agencies, relief groups and the International Monetary Fund, however, say as much as 30% of the increase could be blamed on biofuels.

"Even 1% represents hardship for 16 million people," said Madelon Meijer, agricultural policy advisor for the British aid agency Oxfam. "Three percent already plunges a lot more people into poverty."

Oxfam was one of several groups staging demonstrations outside the conference, with people dressed as corn carrying out symbolic tugs of war between the hungry and those needing fuel. Oxfam argues that the amount of grain required to produce enough ethanol to fill an SUV's tank could feed one person for a year.

Biofuels were once hailed as an alternative to dirty fossil fuels and a way to ease dependence on oil. But experts and others increasingly question the efficiency of biofuels and assert that ethanol production is usurping arable land that should be used for growing food crops or left as oxygen-enhancing forests, wetlands and natural habitats.

Another alternative, of the so-called second-generation biofuels, has emerged. These are fuels made from nonfood substances such as grasses. However, they have not been fully studied and prompt other concerns, such as whether they might become invasive weed-like species if cultivated near other crops.

"We are all reevaluating our policies and technologies . . . and hope to move as quickly to second-generation fuels as possible," Henrietta Fore, administrator of the U.S. Agency for International Development and a member of the delegation, said in a briefing with reporters.

At a closed-door session Wednesday, Schafer also cited second-generation fuels to deflect criticism over U.S. policy, said officials who were present.

"I didn't hear anyone say that demand for biofuels was . . . not part of the equation," said Hafez Ghanem, FAO assistant director-general. "People came up with different figures, of how much to blame this or that cause. We all do agree that we are not facing a transitive problem; this is a problem that will be here for a while."

American agricultural business groups contend biofuels are being unfairly targeted. A large portion of food price increases involve wheat and rice, which are not used for fuel, said Ron Litterer, who farms 1,500 acres of corn and soybeans in Greene, Iowa. Litterer, who is also president of the National Corn Growers Assn., said sufficient corn was being raised for food and fuel. "We've had record production," he said in a telephone interview from Iowa.

The shift to biofuels is only one cause of rocketing food prices. Other factors converging disastrously include high fuel costs, speculation, droughts and floods, and changing diets that spawn greater demand.

American officials are also using the summit to promote genetic engineering as a way to boost food production by increasing crop yields, creating drought-resistant strains and fighting diseases such as stem rust in wheat. But several European countries have banned the use of genetically modified foods.

U.S. officials said they would bypass the Europeans and work directly with developing nations that could benefit from the technology.

"We have a crisis of food availability and prices . . . and this is a tool we can turn to," said Fore, the USAID administrator. She called on opponents to "take a fresh look" at a time that "too many people are hungry."

wilkinson@latimes.com

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Senate Report: Bush Used Iraq Intel He Knew Was False

More than five years after the initial invasion of Iraq, the Senate Intelligence Committee has finally gone on the record: the Bush administration misused, and in some cases disregarded, intelligence which led the nation into war. The two final sections of a long-delayed and much anticipated "Phase II" report on the Bush administration's use of prewar intelligence, released on Thursday morning, accuse senior White House officials of repeatedly misrepresenting the threat posed by Iraq.

In addition, the report on Iraq war intelligence harshly criticizes a Pentagon office for executing "inappropriate, sensitive intelligence activities" without the proper knowledge of the State Department and other agencies.

In addition to judgments that could prove troublesome for the White House and make waves in the presidential race, the report also contains some stinging minority reports from Republican committee members who allege that Democrats turned the intelligence review process into a "partisan exercise."

However, when the GOP controlled the intelligence committee and steered its "Phase I" reporting on the use of Iraq war intelligence, critics complained that tough questions about the Bush administration's actions had been kicked down the road, and thus required a second round of fact finding -- dubbed "Phase II." The committee's delay in producing that full report to the public was seen by Democrats as evidence of a stonewalling campaign executed by President Bush's Republican Senate allies.

Former Committee Chairman Sen. Pat Roberts (R-KS) often vacillated over whether or not the report was worth completing, first promising in 2004 that the work would be finished, and then calling it a "monumental waste of time" later in 2005. When Democrats gained control of the Senate after the 2006 midterm elections, they gained a majority of seats on the committee and set the course for the production of the final reports. Whether by partisan design or simple chance, however, the committee managed to save some of the best questions for last.

The "Phase II" report states -- in terms clearer than any previous government publication -- that there was no operational relationship between Al Qaeda and Saddam Hussein, that Bush officials were not truthful about the difficulties the United States would face in post-war Iraq and that their public statements did not reflect intelligence they had at the time, and, specifically, that the intelligence community would not confirm any meeting between Iraqi officials and Mohamed Atta -- a claim that was nevertheless publicly repeated.

"Before taking the country to war, this Administration owed it to the American people to give them a 100 percent accurate picture of the threat we faced. Unfortunately, our Committee has concluded that the Administration made significant claims that were not supported by the intelligence," Rockefeller said in a statement provided to The Huffington Post.

"In making the case for war, the Administration repeatedly presented intelligence as fact when in reality it was unsubstantiated, contradicted, or even non-existent. As a result, the American people were led to believe that the threat from Iraq was much greater than actually existed. ... There is no question we all relied on flawed intelligence. But, there is a fundamental difference between relying on incorrect intelligence and deliberately painting a picture to the American people that you know is not fully accurate."

In a minority report authored by Sens. Orrin Hatch, Christopher Bond and Richard Burr, the Republicans accuse committee Democrats of committing a key error of governmental logic. "Intelligence informs policy. It does not dictate policy," they wrote. "Intelligence professionals are responsible for their failures in intelligence collection, analysis, counter-intelligence and covert action. Policymakers must also bear the burden of their mistakes, an entirely different order of mistakes. It is a pity this report fails to illuminate this distinction."

The key findings released by Rockefeller and his divided committee brings the five-part "Phase II" of the committee's report on prewar intelligence to completion. The investigation's first phase was released on July 2004, and two less controversial parts of "Phase II" were declassified in September 2006.

The potential election year impact of these latest findings is uncertain. On the stump, Sen. John McCain has explained his support of the "surge" strategy in Iraq by saying the country has become the "central front" in the war on terror -- a framing that attempts to shoot past the question of Iraq's status in the terror hierarchy during the 2003 campaign waged in Congress to authorize military action.

Still, the breadth of the Committee's citations of examples in which the Bush administration's comments were not supported by intelligence could reignite public dissatisfaction over the war. According to a release from Rockefeller's office that was provided to The Huffington Post, these examples include:

-- Statements and implications by the President and Secretary of State suggesting that Iraq and al-Qa'ida had a partnership, or that Iraq had provided al-Qa'ida with weapons training, were not substantiated by the intelligence.

-- Statements by the President and the Vice President indicating that Saddam Hussein was prepared to give weapons of mass destruction to terrorist groups for attacks against the United States were contradicted by available intelligence information.

-- Statements by President Bush and Vice President Cheney regarding the postwar situation in Iraq, in terms of the political, security, and economic, did not reflect the concerns and uncertainties expressed in the intelligence products.

-- Statements by the President and Vice President prior to the October 2002 National Intelligence Estimate regarding Iraq's chemical weapons production capability and activities did not reflect the intelligence community's uncertainties as to whether such production was ongoing.

-- The Secretary of Defense's statement that the Iraqi government operated underground WMD facilities that were not vulnerable to conventional airstrikes because they were underground and deeply buried was not substantiated by available intelligence information.

-- The Intelligence Community did not confirm that Muhammad Atta met an Iraqi intelligence officer in Prague in 2001 as the Vice President repeatedly claimed.

"It has been four years since the Committee began the second phase of its review," Sen. Dianne Feinstein wrote in her note attached to the report. "The results are now in. Even though the intelligence before the war supported inaccurate statements, this Administration distorted the intelligence in order to build its case to go to war. The Executive Branch released only those findings that supported the argument, did not relay uncertainties, and at times made statements beyond what the intelligence supported."

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Police to Seal Off D.C. Neighborhoods

Can you say Police State? The Examiner has the scoop on a controversial new program announced today that would create so-called "Neighborhood Safety Zones" which would serve to partially seal off certain parts of the city. D.C. Police would set-up checkpoints in targeted areas, demand to see ID and refuse admittance to people who don't live there, work there or have a “legitimate reason” to be there. Wow. Just, wow.

Some of the words used to describe such a plan by those quoted in the Examiner story include "breathtaking" and "cockamamie," but that hardly begins to scratch the surface. Interim Attorney General Peter Nickles actually said that measures of this sort have "been used in other cities.” Which cities are those, Mr. Nickles? Warsaw?

Today's proposal appears to be a desperate attempt by the city to tamp down recent violence that has ravaged the city, especially in Ward 5. The "Neighborhood Safety Zones" would last up to 10 days. It's a struggle to think of words to describe such a plan other than authoritarian or ghettoization.

The full description of this plan from the mayor's press release is below.

Photo by AlbinoFlea

The Neighborhood Safety Zone initiative has been developed to help increase security for those who live in high-crime areas around the city and to help residents reclaim their communities. The program will authorize the Metropolitan Police Department to set up public safety checks to help safeguard community members and create safer neighborhoods in the District by increasing police presence aimed at deterring crime.

The safety zones will be established only upon request by a District Commander where there is evidence to support the existence of neighborhood violent crime, such as intelligence, violent crime data, police reports and feedback and concerns from the affected community.

Potential Neighborhood Safety Zones must be approved by the Chief of Police, and will be in effect for a maximum of 10 days. Public safety checks will be established along the main thoroughfares of the established neighborhoods. Anyone driving into a designated area may be asked to show valid identification with a home address in that neighborhood, or to provide an explanation for entering the NSZ, such as attending church, a doctor’s appointment or visiting friends or relatives. Pedestrians will not be subject to the public safety checks.

“The Neighborhood Safety Zones is just another tool MPD will employ to stop crime before it happens. The Neighborhood Safety Zone initiative will help residents terrorized by violent crime to take back their neighborhoods,” said Chief Lanier.

Initiatives such as the Neighborhood Safety Zones have been accepted by federal courts as a legitimate law enforcement practice in keeping with the Constitution’s Fourth Amendment. The constitutionality of the NSZ initiative has been reviewed by the D.C. Office of the Attorney General.

The NSZ will be launched next week in the Trinidad area.

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Woman with objects fetish marries Eiffel Tower

A woman who has a bizarre fetish for inanimate objects has married the Eiffel Tower.

Erika La Tour Eiffel has 'married' Paris's famous monument

Erika La Tour Eiffel, 37, a former soldier who lives in San Francisco, has been in love with objects before. Her first infatuation was with Lance, a bow that helped her to become a world-class archer, she is fond of the Berlin Wall and she claims to have a physical relationship with a piece of fence she keeps in her bedroom.

But it is the Eiffel Tower she has pledged to love, honour and obey in an intimate ceremony attended by a handful of friends.

She has changed her name legally to reflect the bond.

She revisits the massive structure as part of a documentary on Five on Objectum-Sexual women. There are around 40 people in the world who have declared themselves OS, all of them women and many of them also Asperger's Syndrome sufferers.

The OS term was first coined by Eija-Riitta Berliner-Mauer, a 54-year-old woman who has been "married" to the Berlin Wall for 29 years.

Before returning to Paris for her first wedding anniversary, Mrs La Tour Eiffel visits the Berlin Wall, where her affection for what many Germans see as a symbol of repression leads to an uncomfortable encounter with a member of the staff at the Checkpoint Charlie museum.

"I just don't understand how some people can bring someone into the world like a child - an object - and then not love them," she said.

She explained that she feels an affinity with the wall: "I am the Berlin Wall. Hate me, try to break me apart, but I will still be here, standing."

She blames her upbringing for her condition. She claims to have been molested by her half-brother and abandoned by her parents to various foster homes.

"If I am the way I am today because of everything that happened to me, then I'm alright with it," she said. "I wouldn't change who I am now."

Jerry Brooker, from New York State, one of the psychotherapists interviewed for the documentary, said that OS women were motivated by a need for control.

"Someone who falls in love with objects can control that relationship on their own terms," he said. "Their objects will not let them down. That is extremely attractive for a person who is otherwise often desperately lonely."

The Woman Who Married the Eiffel Tower is on Five at 10pm on June 4.

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Why, In China, Gas Is $2.49 A Gallon

China's strong economy and huge appetite for energy have been key drivers in the current $130-per-barrel price of oil. China imports over half of its oil, regards the industry as "strategically vital," controls retail prices and is facing inflation in excess of 8%. The price may seem daunting in the U.S., but it is much more so in China.

Here are China's current oil sector particulars: Domestic production is about 4 million barrels a day, and that figure is rising very slowly. I have found no credible energy expert who expects Chinese production to rise meaningfully above the current range anytime in the foreseeable future.

Current consumption is now about 8 million barrels a day and rising at a rapid 7% annual rate, the highest growth rate in the world. Remember that China is becoming more energy efficient with each passing year--10% real gross domestic product growth, compared with 7% energy use--in line with its historical economic development pattern.

But China has been the primary contributor to the increasing oil demand over the last decade; its demand grows 65% faster than the U.S. and four times faster than India. Over the next decade, I don't foresee much change in oil's share of total energy use in China, compared with coal, natural gas and other forms of energy. Energy source substitution is difficult, expensive and takes time.

So, China is now required to import around 4 million barrels of oil a day just to keep its economy going. China has been a net importer of oil since 1993 and exports essentially no oil. Oil imports are likely to rise about 0.5 million barrels a day each year with a healthy Chinese economy. Using a round number of $100 a barrel, China's annual current oil import bill alone is about $144 billion, up about $72 billion this year alone. It's a big number.

Beijing is left wondering, first, how to handle the short-term price shock and, second, what the best long-term strategy would be.

Controlling oil prices in China is a disaster. In the short term, China's inflation rate is over 8%, a figure that's both high and worrisome. So Beijing is holding down many prices--including oil--with a cumbersome price-control scheme.

Consider the following: Since January 2007, global crude oil prices have risen by 109%; gasoline prices in the U.S. have risen by 77% (roughly apace); gasoline prices in China have risen only 9%.

Gasoline in the U.S. now sells for around $4 per gallon, but it sells for $2.49 per gallon in China. Beijing last raised domestic gasoline prices in November 2007, by 9%, and that was the first and only hike since January 2007, when crude was $87 per barrel. A recent rumor that China was about to lift its gasoline-price controls was quickly dismissed by Beijing.

China's energy sector, regarded as "strategically vital," is dominated by three giant state-owned enterprises. If Beijing wants anything in energy, it is control. But as China becomes more integrated into the global economy, global rules--not China's rules--are increasingly intervening.

So here is where it gets really crazy. China National Offshore Oil Corporation (nyse: CEO - news - people ), largely an exploration and development driller, sells its output at roughly the globally-set crude oil price to the state-owned refiners, primarily PetroChina (nyse: PTR - news - people ) and Sinopec (nyse: SHI - news - people ). CNOOC's earnings were up 56% in the first quarter of this year, in a global bull market for oil. No surprise.

Sinopec, conversely, with little drilling capability, buys crude at the global price and sells at the state-controlled retail price, taking a giant bath on every gallon of product they sell. During the first quarter of 2008, their earnings were down 81%. Ouch.

Then there is PetroChina, which has considerable domestic production but also must buy some oil at world prices and sell at the below-market state-set price. PetroChina's earnings were down 56% in the first quarter.

Beijing will subsidize the domestic gasoline retailers, mostly Sinopec and PetroChina, about $40 billion this year for the price-cost squeeze just described. The oil bureaucrats in Beijing mean well, but what a tangle! How can global investors make any sense of this?

At some point, the domestic oil price in China must rise to the world price, but, at present, that would unacceptably lift inflation. So Beijing watches and waits with a price system that is not functioning. Beijing can afford this massive subsidy to China's oil consumers with its current favorable budget situation.

But make no mistake: This hold-down of retail prices is a subsidy to energy consumers that is hidden in the government's budget. The taxpayers are paying for these lower oil prices. They just don't see it at the pump with the current inflation statistics.

For the longer term, Beijing is actively seeking secure sources of fuel for their economy, hoping to make multi-year deals for reliable energy reserves in the Middle East, Africa, Canada, Russia and elsewhere. Should those deals materialize, Beijing will ensure it has oil available. But oil prices are set in the global market, and Beijing would still be saddled with subsidizing their gasoline retailers if they want domestic prices to remain below market levels.

While I don't approve of how China is behaving in the energy sector at present, it is arguably just as defensible as actions taken by officials in Washington, D.C. It has been almost 35 years since the first oil shock in October 1973. At that time, OPEC raised oil prices from $2.71 per barrel to roughly $8 per barrel--and we still don't have an energy policy. What's the hurry?

Donald H. Straszheim is vice chairman of Roth Capital Partners in Los Angeles, former global chief economist at Merrill Lynch (nyse: MER - news - people ), a visiting scholar at the University of California-Los Angeles Anderson School of Management and a longtime China specialist. He previously served as president of the Milken Institute and joined Roth in 2006 to spearhead the company's China initiatives.

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