Pretty much every bullish commodity story in the last few years has mentioned one common word: China. China's insatiable demand for energy, materials - anything that drives growth - is legend. So you'd think that a local player - one who could provide the same product as global companies, but without having to deal with export/import issues and costs - would be a great play. For instance, PetroChina (NYSE: PTR). PetroChina is one of China's largest oil and gas companies. But the problem with ginormous oil companies is that they suffer from being both the user and provider of the commodities in which they play. PetroChina does everything from exploration and development (not a bad business) to refining and marketing (a fairly bad business right now, it turns out). And as such, they've had a pretty terrible 12 months.   The stock price pop last fall was from its listing on the Shanghai exchange - call it the Google effect. If you remove the pop, the decline doesn't seem so severe. After all, oil company stocks are down all over. Still, back in the fall of ‘07, news of PetroChina's listing on the Shanghai market generated much excitement - and a lot of comparison. One of the most common comparisons was to Exxon, the world's largest oil company. With the Shanghai listing and the craze that surrounded the event, PetroChina was valued at an incredible $1 trillion at one point. Since the crash, the current market cap is sitting around $226 billion, about half of what Exxon is at right now. So how does Exxon look?   Again, if you remove the pop on PetroChina's chart, Exxon-Mobil's looks about the same - maybe a little better, depending on where you'd want to drop the hypothetical starting line. But they both lag crude oil badly. One thing both companies have had to deal with is the margins in its own refinery businesses. Yes, Exxon posted record-breaking profits in 2007 as well as the first two quarters of 2008, as it was able to lock in prices for selling crude. But at the same time, the margins in refining were crippling. For PetroChina, the problem's even worse. The reason is that Exxon has one big advantage: It is a global company, operating in the free market. PetroChina is not. Substantially all of its holdings are in China, subject to the whim of the Chinese government. Where U.S. companies have managed to avoid windfall taxes, Chinese oil companies haven't. A tax that has been around since 2006 costs the companies 20% on revenues if crude is over $40 a barrel, 40% when crude is over $60 a barrel. PetroChina's tab last year was 47.8 billion yuan, or around $7 billion. Ouch. There's no news yet if the tax threshold will be raised. To add insult to injury, the government controls the price at which oil and gas companies are allowed to sell their products. In other words, not only does PetroChina not get to keep what it makes, it can't even sell its products at a real market price. There is a convoluted system designed to help Chinese refinery operations - China currently levies a tax on all oil imports into the country, and rebates back that tax to refiners in an effort to give refiners a healthy margin. But there are rumors that those subsidies will be reduced because of the recent decreases in crude prices and increases in the state-mandated prices of gasoline and diesel. Some companies are attempting to reduce their tax burden by using alternate benchmarks to change the valuation of the crude they produce. Hey, anything to save a yuan! The 20% increases in refined prices back in June were too late to help PetroChina's 1H 2008 results, which showed earnings down 34.5% compared with 1H 2007. Analysts knew earnings would be low, but they came in lower than expected - 24.74 billion yuan rather than the expected 26.05 billion yuan. à la Capatilism? So here's the cocktail party bottom line. Yes, China is big in the oil business. They produced 186.66 million tons of oil last year and used all of it and then some, consuming 300 million tons. Last year imports were up 12.4% - almost 50% of oil consumed in the country was imported. This means PetroChina, as the No. 2 refiner in China, was hard hit by the high oil/low gasoline price margin squeeze - just like refiners everywhere in the world, but with a side order of mock-capitalism. Proving the point, other Chinese oil companies - such as CNOOC Limited (COE.N) which does not have a large refining business - were better positioned in the first part of the year, where they didn't have to deal with these issues. CNOOC saw an 89.3% increase in net profit at the same time PetroChina was down 34.5%. They were probably selling to PetroChina, all the while discovering new oil fields and keeping costs-per-barrel way down. So how do things turn around? With the Olympics over, demand for gasoline has been coming down, and China may go from a net importer of refined petroleum back to being a net exporter. (China stockpiled like crazy to make sure there were no shortages in diesel to haul Phelps' medals around, and now that he's left, China has a large stockpile lying around). Ironically, because PetroChina can sell refined products outside of China for whatever price they please, the best of all possible worlds is for local demand to plummet. Barring that, unfavorable prices at home may cause companies to send products abroad - perhaps say, 60,000 tons of gasoline to Southeast Asia - according to an article on Forbes. In case you're taking notes, that's pretty much the exact opposite of what's supposed to happen in markets. Demand drying up should, in a vacuum, be BAD for the net-selling price of a commodity. At the same time, decreasing crude oil prices are helping ease the crack-spread-squeeze worldwide, and that will help China too. Written by Julian Murdoch