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Transparency in oil pricing mechanism
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By Ma Guangyuan

The National Development and Reform Commission (NDRC) announced on Tuesday that benchmark retail prices of gasoline and diesel would be raised by 290 yuan (US$42.46) per tonne and 180 yuan per tonne respectively at midnight on March 25.

This marks the government's first price adjustment for finished oil products since the creation of a new oil pricing mechanism on January 1 this year.

Zhou Dadi, former director of NDRC's energy research institute, said that the new pricing mechanism enables China to "respond more quickly" to international oil price changes.

Before the new fuel tax reform was introduced at the beginning of this year, the international crude price plummeted from a record high of 147 US dollars a barrel to 50 US dollars a barrel. However, oil prices in China failed to respond to the global fluctuations and remained steady.

It is true that the new oil pricing mechanism responds faster than previously, but in a very selective way. The crude price dropped below 35 US dollars a barrel in the global market on February 17 this year but the government did not lower domestic fuel prices accordingly.

According to officials from NDRC's pricing department, under the new oil pricing mechanism, China's domestic prices are to be "indirectly linked" to global crude prices "in a controlled manner." The "indirect link" will use average global crude prices "over a certain period", domestic processing costs, taxation, and "appropriate profits" of oil producers to determine domestic prices.

It is hard to determine the data including the processing costs of domestic oil refiners in the "certain period." The NDRC did not publicize the data when it announced the price adjustment on Tuesday. Neither did it give any reason for the price rise, given that the global crude price had rebounded for less than a month and still faces uncertainty.

As the newly-initiated oil price mechanism aims to "indirectly link" China's domestic fuel price to global price changes, the public hope to see more fairness in price adjustments. They look forward to more transparency in government pricing policies so as to give consumers a certain expectation.

Firstly, the public needs to know on what global crude oil prices the domestic fuel prices are based; secondly, how long the "certain period" is. One month, two months, or a quarter? The length of time would shed light on how much domestic oil prices lag behind global prices; thirdly, what is the average cost of domestic processing and in which direction the cost will probably move; fourthly, how to define "appropriate profits" of domestic refiners; fifthly, whether the pricing department can nail down a "hard" criterion to determine price adjustments. That is to say, to what extent do global crude prices have to fluctuate, before the government acts to adjust domestic prices?

As long as those questions are answered, transparency will be guaranteed, even when the pricing policy is way from perfect. And it is still not too late to weigh the interests of consumers and oil industry players.

Another question raised after the latest price adjustment is why the government hiked the prices when it has a large oil products stockpile. By the end of February, the stockpile had grown 36.3 percent year on year to reach 14.85 million tones, according to China Petroleum and Chemical Industry Association. The figure also represents an 11.4 percent increase from the previous month. Currently, in the face of the gloomy market, the stockpile will continue to increase as demand remains depressed. Against this backdrop, the latest price hike does not hold water.

Actually, it is hard to expect a market-oriented oil price when production, sales and pricing are still not fully marketized. There were a lot of doubts going on about the deviation of domestic oil prices from global prices when the fuel tax reform was initiated. However, these doubts were ignored by domestic oil giants who instead kept the domestic fuel prices at a high level for half a year, indicating how industrial monopolies affect government policies.

The author is a research fellow with the Chinese Academy of Social Sciences and a business commentator.

(China.org.cn translated by Yuan Fang March 26, 2009)

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