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Fuel Price Cuts Spark Debate on Controls
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The recent 8-percent price cut by a joint venture fuel company, despite lasting just a day, triggered widespread concerns from the NPC and the CPPCC and rekindled the debate on whether oil price control should be eased in China.


State-owned oil producer China National Petroleum Corporation (CNPC) responded to these concerns by cutting the price of its major oil products by up to 0.2 yuan in Beijing.


"The 8-percent price flexibility has almost been forgotten because of the price monopoly by national oil giants CNPC and Sinopec. Grassroots consumers will not benefit from national policies unless the price monopoly is shattered," said Feng Shiliang, a CPPCC National Committee member.


Total-Sinochem Fuels, a joint venture established by Total and Sinochem focusing on oil products retail, dropped the retail price for gasoline by around 8 percent when it opened two new stations in Beijing recently.


NPC deputy Ling Yu had predicted the price cut would trigger widespread ripple effects for Sinopec and CNPC to follow suit. PetroChina CNPC's listed arm and Sinopec, however, denied such a possibility yesterday.


"The price cut this time is just a normal promotion campaign by our Beijing branch, in line with the national policy. We have no unified plan yet to launch a nationwide price war," Zhang Anping, a press official with PetroChina told China Daily. CNPC's campaign will last a month in Beijing.


Zhang Zhiguo, a press official with Beijing-based Sinopec, said his company had no intention to follow suit. "CNPC's move is temporary, and we will not follow them. We will stick to our own marketing strategies."


It's a golden opportunity for CNPC to start a promotional campaign during the country's annual session of NPC and CPPCC, highlighting corporate social responsibility, said Han Xuegong, a CNPC analyst. "It's a positive move to pay something back to consumers. Moreover, a price drop can boost sales."


Han pointed out that the price cut by Total-Sinochem Fuels and CNPC was aimed at raising brand awareness, rather than starting a price war. A full-scale price cut is the last possible option within the strategically important energy segment in China, Han said.


China's oil products are priced based on the average price of international crude, plus adequate profit for refineries, tariffs and logistical costs. Oil firms can vary the final retail price by up to 8 percent.


CNPC and Sinopec dominate the local retail market with the lion's share of filling stations. Thus they have no strong motive to drop the government-set price.


Although the price drop will benefit ordinary end-users, it will not prevail in the market in the short run, said an official from global oil firm BP.


Crude refining is not a profitable business in China, given the government's stringent price controls. To fend off supply fluctuations and inflation, the government keeps a tight grip on the price of major oil products and makes sure it is below the global level.


Of course, CNPC, which enjoys high profitability from oil exploration and production, can easily take a cut in its retail profit, Han said.


Market-set price?


The price cut from both joint venture and State-owned stations has reignited another debate: whether price control should be lifted altogether.


David Ernsberger, Asia editorial director of Platts, a global energy information and market research provider, said the oil pricing mechanism in China should be more market-oriented.


"A market-based pricing system will generate immediate effects on supply and demand Of course, there are challenges in the process of reform and it will take time and a thoughtful pace," Ernsberger said.


(China Daily March 15, 2007)


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