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Oil's not well
By Wan Zhihong (China Daily)
Updated: 2008-06-16 10:52

Pricing reform

Facing high international crude prices, some countries have raised their refined oil prices. This month India announced an 11 percent rise in its gasoline price while Malaysia raised price of gasoline by 41 percent and diesel by 64 percent.

But China has refrained from adjusting refined oil prices for over half a year. Analysts said high inflation in recent months is a major deterrent. "Any rise in refined oil prices could push up the already high rate of inflation," says Zhou Dadi, vice-director of China Energy Research Society. China's consumer price index (CPI), the main gauge of inflation, rose 8.5 percent year-on-year in April and 7.7 percent in May. The figure was 8.3 percent in March and a nearly a 12-year-high of 8.7 percent in February.

Oil's not well

"Energy-intensive industries still drive China's rapid economic development. A rise in oil product prices might hamper this sector," says Wang Jian, secretary-general of China Society of Macroeconomics affiliated with the National Development and Reform Commission (NDRC).

Instead of raising prices, China has chosen to subsidize domestic oil companies to cover their refining losses. Sinopec in April got 7.1 billion yuan in subsidies. In March, it got an even bigger subsidy 12.3 billion yuan, of which 4.9 billion yuan was counted as 2007 earnings and 7.4 billion yuan as first-quarter income.

But oil companies still complain the subsidies don't fully cover their losses. With a crude price of $130 a barrel, Sinopec loses around 3,000 yuan in processing every ton of gasoline or diesel, says Sinopec Board Secretary Chen Ge.

Domestic oil companies have also suggested the government raise the threshold of windfall taxes, or special oil gain levy. China's current threshold for windfall taxes is $40 per barrel and 40 percent beyond $60 per barrel.

Last year PetroChina paid around 45 billion yuan in windfall taxes. The tax threshold should have been raised when crude price surpassed $80, according to PetroChina Chairman Jiang Jiemin.

"China should further reform its oil pricing mechanism to develop a healthy oil industry," says Zhou Dadi. "The government may adjust refined oil prices step by step to link them fully to international prices."


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