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New Oil Pricing System Fuels Debate
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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 system".


"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 Daily.


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 refineries.


Sinopec, Asia's top refiner, gave some clues as to what had actually happened.


"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 a stir.


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 said.


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 consideration.


"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.


Market rules?


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)


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