In a policy shift, the Chinese government's National Development and Reform Commission announced it will increase domestic gasoline and diesel prices by 17-18% starting at midnight Thursday (China time), the Wall Street Journal reported Thursday. (Subscription required.)

Oil fell $2.56 to $134.12 per barrel in Thursday mid-day trading on the news. Economists and oil industry analysts say surging demand for oil and oil products in China and India has been a major factor in oil's more than 400% price rise since 2000.

The other major energy commodities also fell substantially Thursday on the news. Heating oil plunged 8 cents to $3.77 per gallon, unleaded gasoline added plummeted 7 cents to $3.39 per gallon, and natural gas fell 28 cents to $12.93 per million BTUs.

Both China and India subsidize the price of fuels, and analysts are quick to point out that China's retail prices will still be below market prices.

Thursday's action has China's first oil product price increase since November 2007, The Journal reported. (Subscription required.)

Oil price surge 'forces China's hand'

Economist David H. Wang told BloggingStocks Thursday oil's relentless rise "forced China's hand." China had sought to keep both diesel and gasoline prices, and other fuel commodities, well below market price levels to stimulate economic growth, he said, but the large subsidies required to do so in the face of +$130 per barrel oil required a policy adjustment "to close the gap."

"Long-term, China realizes that it can not continue to subsidize motor fuel or oil by large amounts without sustaining large losses, but short-term I think they're realizing now that maybe a higher price will encourage more-efficient use of fuel," Wang said. "Refiners were also caught in a bind because government price controls on motor fuel were forcing them to sell the refined product at a loss, so many refiners stopped producing it, which of course has led to shortages."

Jim Dietz, independent energy trader, said China's policy will "help ease oil demand concerns in international markets." "They're the second biggest user of oil after the United States and this major bull run for oil is based on rising Asian demand. If you take that out of the equation, it's a different market," Dietz said. However, Dietz added he still expects China's oil and motor fuel consumption to increase, but that the rate of increase may slow, which will help cool global oil prices. Dietz added that he is presently flat, or has no open energy trading positions.

China's action also all occurs just ahead of Saudi Arabia's special oil summit of oil producers and consumers in Jeddah, set for June 22. Saudi Arabian Oil Minister Ali al-Naimi called the summit to find a solution to "stabilize" oil prices he argues are "unjustified" by supply/demand fundamentals.