From June 2000, China tried to keep domestic refined oil prices in line with the international oil market. The Singapore market was used for referential prices at the time.

In November 2001, China reformed the pricing mechanism yet again. At the core of this reform was a severing of the link between domestic oil prices and international oil prices. The oil markets of Rotterdam and New York also began to be used as price references. When the international price of oil is within the scope of 5 percent to 8 percent, China's domestic oil prices will not change. When international oil prices fluctuate beyond that range, the former State Development and Reform Commission will adjust benchmark prices.

Domestic oil price hikes depend on level of consideration

Why did the price of oil rise in line with the international oil market, but not fall with it?

Wang Zhen: Since 2002, the State Development and Reform Commission have adjusted the domestic price of refined oil. However, the lengthiness and the size of the price hike meant that price adjustments were not entirely synchronized with that of the pricing mechanism. As a result, the rising price of crude oil in the international market was immensely profitable to oil companies at the higher echelons of the industry but those in the lower suffered. Consumers were also confused about the increasing price of refined oil products.

China's purpose in implementing this policy change was to stabilize domestic oil prices. At the time, international oil prices were relatively stable. The volume of crude oil that China imported was not significant. Consequently domestic oil prices were relatively free of the impact of fluctuations in international oil prices. Even with the implementation of a refined oil pricing mechanism, domestic prices remain unchanged in the event of minor price fluctuations in the international market. However, rapid and significant price increases were unprecedented. The government chose not to adjust the price entirely in accordance with the established pricing mechanism because it would have pushed up prices enormously, which would have been difficult for people to accept. The State Development and Reform Commission there for chose to adopt a policy of moderate and gradual adjustment. However, the question remains as to whether to lower the refined oil prices after a decline in international crude oil prices. This will depend on the difference between the price of refined oil on the domestic market and crude oil on the international market.

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