Prices of domestic refined oil products may have been cut in
line with lower global prices, but the era of real flexibility in
the country's pricing system is still some way off.
The National Development and Reform Commission (NDRC), the
ministry-level body that plans the economy, announced on Saturday
that it would cut the wholesale price of gasoline by 220 yuan
($28.21) per ton and the price of kerosene by 90 yuan ($11.54) per
ton from yesterday.
The move marked the first price-cut for refined oil products
sold on the Chinese mainland since May 2005. The price of oil
products had gone up 12 times since 2003, including twice last
year, in line with soaring global oil prices, Xinhua News Agency
"The local price cut that took effect (on Sunday) was necessary
and well-founded because crude prices have declined and the new
oil-pricing mechanism is not yet available for public review," Han
Wenke, director of the NDRC's Energy Research Institute, told
China Daily yesterday.
He said that because the wholesale market for oil products is
still dominated by State-owned giants mainly the China National
Petroleum Corporation (CNPC) and China Petroleum and Chemical
Corporation (Sinopec) it is natural for the government to keep a
tight grip on pricing.
No new pricing system
He added that the government would not adopt the new pricing
system in the foreseeable future.
"Although lower global oil prices will help pave the way for a
new pricing system that is expected to track international crude
prices more closely, the recent drop in (domestic) prices may not
necessarily have been connected to that system," Han said.
Zhou Dadi, the retired former director of the Energy Research
Institute, echoed his successor's comments.
"Even if a new pricing mechanism is adopted, State intervention
in pricing will still apply in China, where the wholesale market is
mainly controlled by Sinopec and CNPC," Zhou said.
The government adjusts oil prices only when the international
price changes by more than 8 per cent. For refiners, this can lead
to major losses as they pay large export bills when international
crude prices are high, but cannot raise prices of the products they
produce, such as gasoline for automobiles.
According to news reports, the NDRC had earlier been considering
de-linking the price peg between local oil products and oil
products sold in Singapore, Rotterdam and New York, which had been
the standard for the past five years.
Instead, the top economic planner was said to be weighing the
possibility of linking the prices of local oil products to crude
prices in Brent, Dubai and Minas, which would more accurately
reflect prices in the global market.
Analysts argue that the NDRC should adopt the new pricing system
now, while global oil prices are low. Crude oil for February
delivery fell to $52.99 a barrel last Friday on the New York
Mercantile Exchange. It was the fourth straight weekly decline,
according to Bloomberg.
"Naturally, it would be easier for the public to accept a new
pricing system that is designed to more accurately reflect global
market conditions when the global price is low," said Han Xuegong,
a veteran consultant for CNPC.
Cao Xiaoxi, an analyst at Sinopec, struck a similar note. "It
would make sense to adopt the new system now. Of course, it is up
to the authorities to make the final decision. Besides, oil prices
may continue their decline," Cao told China Daily.
Lower fuel prices will benefit China's grass-roots consumers and
oil-dependent industries like aviation and public transportation,
said Lee Mei Leng, chief analyst at the Beijing office of Platts, a
company that monitors the energy sector.
Lee added that the recent price cut for local oil products could
prove painful to major refiners, which have long had to contend
with high import prices and low retail prices.
However, Han said lower costs for crude imports and reductions
in the windfall tax on oil earnings would soften the blow.
A Beijing taxi driver surnamed Chai said he was happy about the
news and estimated he would save at least 5 yuan per day (63
cents), thanks to the lower gas prices.
"The government should take into account the interests of both
oil enterprises and ordinary consumers," Chai said.
Xu Xiaobing, a Beijing resident who spends 1,200 yuan ($150) per
month on gas for his private car, said the lower gas prices
reflected the government's desire to adopt international
(China Daily January 15, 2007)