Prices of domestic refined oil products may have been cut in line with lower
global prices, but the era of real flexibility in the country's pricing system
is still some way off.
The National Development and Reform Commission (NDRC), the ministry-level
body that plans the economy, announced on Saturday that it would cut the
wholesale price of gasoline by 220 yuan ($28.21) per ton and the price of
kerosene by 90 yuan ($11.54) per ton from yesterday.
A gas station worker adjusts
price board in Beijing on January 14, 2006 after China
decide to lower down refined oil prices. [Xinhua]
The move marked the first price-cut for refined oil products sold on the
Chinese mainland since May 2005. The price of oil products had gone up 12 times
since 2003, including twice last year, in line with soaring global oil prices,
Xinhua News Agency reported.
"The local price cut that took effect (on Sunday) was necessary and
well-founded because crude prices have declined and the new oil-pricing
mechanism is not yet available for public review," Han Wenke, director of the
NDRC's Energy Research Institute, told China Daily yesterday.
He said that because the wholesale market for oil products is still dominated
by State-owned giants mainly the China National Petroleum Corporation (CNPC) and
China Petroleum and Chemical Corporation (Sinopec) it is natural for the
government to keep a tight grip on pricing.
No new pricing system
He added that the government would not adopt the new pricing system in the
"Although lower global oil prices will help pave the way for a new pricing
system that is expected to track international crude prices more closely, the
recent drop in (domestic) prices may not necessarily have been connected to that
system," Han said.
Zhou Dadi, the retired former director of the Energy Research Institute,
echoed his successor's comments.
"Even if a new pricing mechanism is adopted, State intervention in pricing
will still apply in China, where the wholesale market is mainly controlled by
Sinopec and CNPC," Zhou said.
The government adjusts oil prices only when the international price changes
by more than 8 per cent. For refiners, this can lead to major losses as they pay
large export bills when international crude prices are high, but cannot raise
prices of the products they produce, such as gasoline for automobiles.
According to news reports, the NDRC had earlier been considering de-linking
the price peg between local oil products and oil products sold in Singapore,
Rotterdam and New York, which had been the standard for the past five years.
Instead, the top economic planner was said to be weighing the possibility of
linking the prices of local oil products to crude prices in Brent, Dubai and
Minas, which would more accurately reflect prices in the global market.
Analysts argue that the NDRC should adopt the new pricing system now, while
global oil prices are low. Crude oil for February delivery fell to $52.99 a
barrel last Friday on the New York Mercantile Exchange. It was the fourth
straight weekly decline, according to Bloomberg.
"Naturally, it would be easier for the public to accept a new pricing system
that is designed to more accurately reflect global market conditions when the
global price is low," said Han Xuegong, a veteran consultant for CNPC.
Cao Xiaoxi, an analyst at Sinopec, struck a similar note. "It would make
sense to adopt the new system now. Of course, it is up to the authorities to
make the final decision. Besides, oil prices may continue their decline," Cao
told China Daily.
Lower fuel prices will benefit China's grass-roots consumers and
oil-dependent industries like aviation and public transportation, said Lee Mei
Leng, chief analyst at the Beijing office of Platts, a company that monitors the
Lee added that the recent price cut for local oil products could prove
painful to major refiners, which have long had to contend with high import
prices and low retail prices.
However, Han said lower costs for crude imports and reductions in the
windfall tax on oil earnings would soften the blow.
A Beijing taxi driver surnamed Chai said he was happy about the news and
estimated he would save at least 5 yuan per day (63 cents), thanks to the lower
"The government should take into account the interests of both oil
enterprises and ordinary consumers," Chai said.
Xu Xiaobing, a Beijing resident who spends 1,200 yuan ($150) per month on gas
for his private car, said the lower gas prices reflected the government's desire
to adopt international practices.
(China Daily 01/15/2007 page3)