Is a more market-oriented oil pricing mechanism the Holy Grail
to eliminate refiners' deficits and fuel further economic growth?
Probably not.
The National Development and Reform Commission (NDRC) recently
said that a more flexible oil pricing system has "stealthily" taken
effect, designed to better tune local oil product prices to reflect
the international one.
In reality, however, the authority still finds it hard to
balance the interests of all parties using the new mechanism.
Why? The reason is self-evident: the new system is still subject
to official mandates and artificial adjustments.
The NDRC has been reported to be seriously thinking of removing
the price peg between local and international oil products and
instead linking local prices to global crude oil prices.
The top economic planner had never officially confirmed the news
until it was made clear this week that domestic oil products have
long been priced on the average international crude oil price, plus
costs and adequate profits for refineries.
It is true that the new mechanism is a more accurate and
efficient means of reflecting global oil supply and demand. Chinese
refiners' deficits arising from high crude imports and low prices
on local oil products can probably be reduced if the new system is
implemented.
However, people cannot help asking how the authority can
objectively determine the "cost and adequate profit of
refineries".
Costs for different refiners located in different regions may
vary substantially. Moreover, what would be a reasonable profit
margin for both oil refiners and consumers to accept is a hard nut
for the NDRC to crack.
Sinopec confirmed that the authority raised the local refined
oil price twice last year using the new pricing system to relieve
Sinopec's refining deficits. But the top Asian refiner still had to
depend on 5 billion yuan in compensation from the State to cover
its refining deficit.
A fully market-set oil pricing mechanism will not and should not
be available in China in the foreseeable future, based on the fact
that the oil product wholesale business is still State-controlled
and dominated by a few State-owned giants.
(China Daily February 1, 2007)