The declining price of oil in the international market has caused people to question the domestic pricing mechanism, as prices in China have not followed this trend. Wang Zhen, Director of the China Energy Strategic Research Institute at China University of Petroleum addressed this issue in an interview.

Why are international oil prices falling?

Can you briefly explain the reasons for the sustained decline of oil prices in the international market?

Wang Zhen: The price of oil in the international market has recently dropped by 20 percent. The main reason for this is the absence of any serious disaster in the US during the hurricane season which raised oil inventories to a record high. The relatively peaceful geopolitical situation has also contributed to the decline. Funds usually play an important role in the rise and fall of oil prices. It is difficult to predict whether oil prices will continue to decline. While OPEC has cautiously reclaimed its role as the biggest player in the oil market, the northern winter is approaching and this means a significant increase in oil demand.

Lawrence Eagles, head of the International Energy Agency (IEA) Oil Industry and Markets Division said that this is low season for oil. As demand peaks in winter, oil demand in the fourth quarter is expected to be extremely high. Temperatures this winter may be even lower than expected leading to a greater need for oil. Winter is approaching and this must be taken into account.

The link between domestic oil prices and international oil prices
What is the link between the domestic price for oil products and international crude oil prices?

Wang Zhen: Since 1998, the price mechanism governing China's petroleum industry has been reformed three times. On June 3, 1998, the former State Development Planning Commission introduced the Oil & Refined Oil Price Reform Program, which stipulates that the price of crude oil be settled in negotiations between China National Petroleum Corporation and China Petroleum and Chemical Corporation. Government referential prices became effective for petroleum and diesel. The former State Development Planning Commission sets a benchmark price for crude oil according to the after-tax cost of crude oil after taking into account domestic circulation fees. China National Petroleum Corporation and China Petroleum and Chemical Corporation can then set the retail price within a 5 percent range of that figure. Although this program is more advanced than that used in the era of the planned economy, a fatal flaw in the current pricing mechanism was revealed just one year after it was adopted; based on this fixed formula, both oil suppliers and consumers can determine the movement of oil prices in advance. This excessive price transparency led to excessive speculation in the domestic oil market.

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