Oil prices dropped sharply yesterday after the Chinese government raised fuel prices by 18 per cent.

Sweet crude for July delivery fell $4.75 to $131.93 (£67) a barrel on the New York Mercantile Exchange last night. Oil prices have been climbing in recent weeks, touching a record $139 (£70) a barrel earlier in the week.

China’s state news agency Xinhua said the rise was an attempt to close the widening gap between domestic and international prices, to ensure supply in the country.

Refiners had been cutting back on production to avoid huge losses made by selling the discounted fuel.

From today, the benchmark gasoline and diesel oil retail prices will be marked up by CNY1,000 (£70) per tonne, with the price of aviation kerosene up by CNY1,500 (£110) per tonne.

Natural gas and liquefied petroleum gas prices will remain unchanged, Xinhua said.

The rise is China’s first price hike in eight months. The government has tried to avoid raising prices to keep inflation down.

The news agency also reported the average electricity tariff will be raised by 2.5 cents per kwh starting from July 1st, up 4.7 per cent on average, due to the rising cost of coal.

China is the world’s second-largest oil consumer, and high demand from the country has been a factor in pushing up oil prices.