No official announcement was made, but the NDRC recently
confirmed that the long-awaited new oil pricing mechanism has been
in effect "for quite a while".
The new system, designed to balance supply and demand of major
oil products in the country, falls short of the expectations of
some analysts as there is "no substantial change from the old
"The new system is derived from the same format as the old one,
without any fundamental change at all. I do not pin too much hope
on it being able to better adjust supply and demand," Zhou Dadi,
former director of the Energy Research Institute under the National
Development and Reform Commission (NDRC), told China
Han Yongwen, secretary-general of the NDRC, China's top economic
planner, was recently quoted by some Chinese media as saying a more
flexible oil pricing system had been "stealthily" put into effect
some time ago, designed to more effectively bring the local oil
product price in line with the international one.
The NDRC was reportedly considering removing the price peg
between local and international oil products and instead linking
the local price to the global crude oil price.
The NDRC did not officially announce the new system. Han said
domestic oil products had long been priced on the average
international crude oil price, plus costs and profits for
Sinopec, Asia's top refiner, gave some clues as to what had
"We have not received an official notice from the authority
about the pricing system adjustment," a Sinopec source told
China Daily, on condition of anonymity.
"However, the two price hikes last year were partly based on the
new mechanism. Therefore, it also makes sense to say the new system
has been in place for a while."
System sparks debate
Confirmation that the new system is already in place has caused
Some argued the new mechanism could struggle to cope with
certain functions like balancing supply and demand and reflecting
the true value of global crude oil, because it is still subject to
governmental mandate and adjustment.
An anonymous industry source told China Daily the new
system had made little progress.
"I say that because the price system is still under tight
government control and is supposed to protect the monopoly and
guarantee the profit margins of State-owned major refiners such as
Sinopec," said the source from a major local oil producer.
Chen Qingtai, former deputy director of the Development Research
Center under the State Council, called recently for control on
resource prices to be loosened, especially on the oil price.
"A more market-oriented oil pricing mechanism is needed to
allocate natural resources and encourage energy efficiency," Chen
The government should loosen its grip on resource prices, which
are key to curbing consumption and pollution, Chen said.
Those who support the new price mechanism, however, argued that
it is a more scientific system.
Cao Xiaoxi, chief engineer at Sinopec's Economic and Development
Research Institute, said the new oil product price system would
assist Chinese refiners to reduce deficits arising from high crude
imports and low prices on local oil products.
Angelina Lee Mei Leng, chief analyst at Platts in Beijing, told
China Daily the new system was more scientific, based on the fact
that it takes the crude oil price, refining cost and profits into
"The authority keeps its good intention to balance all the
factors involved in setting up the refined oil price. Therefore, it
is a better pricing option than before. Of course, the key to its
success means the authority should make the cost and profit
calculation as transparent and as fair as possible," Lee said.
Under the old pricing mechanism, the government would not adjust
the local oil price until the global oil product price had
fluctuated beyond 8 percent.
It is true the new mechanism is a more accurate and efficient
means of reflecting the global oil supply and fending off
speculation, said Han Xuegong, a veteran CNPC analyst.
But some ordinary consumers and private oil dealers challenged
the authority by asking how they can objectively determine the
"cost and adequate profit of refineries".
"The oil product price should be determined by market rules,
instead of the authority. Cost should not be the one deciding force
in setting the price, otherwise competition cannot be encouraged,"
Yao Daming, an official with the Guangdong Oil and Gas Association,
told China Daily.
NDRC Energy Research Institute Director Han Wenke said that as
long as the wholesale business of oil products is still dominated
by a few State-owned giants, mainly CNPC and Sinopec, it was
natural for the government to keep a tight grip on pricing.
Han's retired predecessor Zhou Dadi agreed: "Even if a more
market-based pricing mechanism is adopted, government intervention
will also apply in China, where the oil product wholesale business
is mainly controlled by Sinopec and CNPC."
(China Daily February 13, 2007)