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As pumps run dry, it is time for pricing reform
China Daily  Updated: 2005-08-15 05:28

The crippling shortage of fuel at many petrol stations in South China's Guangdong Province should not be written off merely as a temporary regional problem.

The case has national implications. It has started alarm bells ringing because of the dire consequences a poorly regulated oil industry could bring about for this increasingly energy-thirsty country.

Many cars have lined up at the very few petrol pumps that are still working. Other drivers have searched their cities in vain.

Such scenes in major cities like Guangzhou and Shenzhen, widely covered by domestic media, have made Guangdong Province, a key powerhouse of the Chinese economy, a nightmare for domestic car makers. While vying for a lion's share of China's dream of becoming the largest country on four wheels, automobile manufacturers hardly expected empty oil tanks to become a reality so soon.

Unfavourable weather that delayed deliveries of the sea-borne oil supply could be cited as a reason for the current drought in the coastal province.

Sky-high oil prices globally are also a factor behind the tight supply in the domestic market.

In spite of the country's more than 9 per cent economic growth in the first seven months of this year, China imported 74.5 million tons of crude oil, up just 5.5 per cent, and 18.1 million tons of refined oil, down 20 per cent year on year.

But aside from these apparent factors, the inefficient oil pricing mechanism regulated by the National Development and Reform Commission is nevertheless the underlying cause.

Baseline prices at domestic petrol pumps are fixed by the commission with reference to international prices at a fixed time in the past. Such a price control mechanism is intended to maintain stability and adjust prices as economic conditions fluctuate.

But the true price of crude oil is determined by lightning-fast changes on the international market both due to the country's growing dependence on oil imports and lack of domestic oil reserves to make up shortfalls.

As a result of the discrepancy in the two pricing systems, the upstream oil companies have raised their prices along with record-breaking international oil prices, leaving downstream domestic refiners to absorb rising costs before retail petrol prices are increased by the authorities.

Sinopec and CNPC, the two State-owned oil giants that monopolize the upstream domestic oil industry, have boasted huge profits in the past year by tapping surging crude oil prices. In sharp contrast, domestic refiners recorded an industry-wide loss.

Though the former's profits surpassed the latter's losses, the National Development and Reform Commission should not have failed to respond as rising costs gradually eroded the profit margins of refiners.

A reduced supply at the petrol pump is the obvious result, as refiners will only suffer greater losses by producing more.

Emergency supplies from other provinces will get Guangdong out of its sticky situation.

But as long as the fundamental pricing mechanism remains distorted, similar problems will occur in other regions.

The pricing authorities should improve regulation by introducing a more advanced pricing system that is in line with market rules. They should not just take into consideration the big State oil companies' profits when making decisions.

(China Daily 08/15/2005 page4)

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