The top economic planning body in China is determined to reform
its oil pricing system to make it more flexible and acceptable to
both consumers and refineries, according to media reports.
The Oriental Morning Post quoted an industry insider as saying
that the National Development and Reform Commission (NDRC) was to
unlink the price peg between locally processed oil products and the
oil products in the three major markets of Singapore, Rotterdam and
New York.
Instead they're planning to link local processed oil products to
Brent, Dubai and Minas crude. Eventually domestic oil product
prices would be based on the average cost of international crude
plus cost and adequate profit following refining, tariffs and
logistics.
China has set the price of processed oil products in line with
the average in Singapore, Rotterdam and New York markets for five
years. As the government only adjusts the oil price when the
international price changes substantially (beyond 8 percent)
consumers often find the final cost sluggish and easy to
speculate.
"The peg switch from oil products to crude oil is really a
breakthrough in the local oil pricing mechanism. The new pricing
mechanism will be available for public review before December 11,"
an anonymous insider revealed to Oriental Morning
Post.
A senior analyst with China National Petroleum Corp (CNPC) told
China Daily that if the reported switch was true it could turn out
to be a more scientific pricing mechanism than at
present.?
"A mechanism based on international crude oil price, instead of
oil product price, will more accurately reflect supply and demand
and will prove to be subject to less vicious market speculation,"
he observed.?
The CNPC analyst, who asked not to be named, said the time was
right for the Chinese Government to further reform its oil pricing
mechanism to better reflect global oil supply and demand.
The analyst said that was because when the price gap between
global and domestic crude oil wasn't too big local consumers would
find a mechanism backed by international prices more
acceptable.
More importantly the new pricing mechanism would potentially
relieve pressure on loss-making local refineries, according to Cao
Xiaoxi, chief engineer of Sinopec Economic and Development Research
Institute. "For major local refineries, such as Sinopec, a more
agile pricing mechanism will help them reduce losses and eventually
make them profitable," Cao said.
Due to soaring international oil prices China's oil exploration
and production business is hugely profitable. But the refining
sector is suffering significant losses as the existing pricing
mechanism is rigid in terms of adjusting the local oil price.
Although the NDRC has raised the price for processed oil
products nine times since July 2003 it's still lower than the
international level.
To fend off supply fluctuations and inflation the government
retains a tight grip on the price of major oil products and keeps
it below the global level. The NDRC raised the domestic oil price
twice in March and May in response to the soaring global price.
(China Daily December 6, 2006)