The Sweet Crude Oil future price has continued to drop on the New York Mercantile Exchange (NYMEX) and the departments in charge of oil pricing in many of China's cities in China have declared that the price of oil will not change. But late last Monday, Beijing's Municipal Commission of Development and Reform issued a statement on oil price increases announcing that benchmark prices for gasoline and diesel oil would increase by 200 yuan and 290 yuan per ton respectively – a price rise whose impact will fall exclusively on drivers in Beijing.

Beijing's private car drivers are puzzled at the news since the global oil price continues to fall, and wonders why the price adjustment is confined to Beijing.

The municipal government has explained that the rise in oil price is due to the adoption of the European IV standards which brought a notable improvement in air quality during the Beijing Olympics.

According to environmental experts, different types of oil are used in cars with different emission levels. In Europe, Euro IV fuel is recommended for use in vehicles with Euro IV emission standards. However, to date China has established national standards only on auto emissions. On fuel, there have been no such standards.

The main contaminant from auto exhaust emissions is sulfur dioxide from the gasoline. Reducing the amount of sulfur in gasoline helps to decrease sulfur dioxide emissions. The respective sulfur content per ton of Euro III and Euro IV grade fuels is 150 ppm and 50 ppm. The revenues from the Beijing price rise are to be spent on decreasing the fuel sulfur content from 150ppm to 50ppm. But the question remains as to how much the real cost of this change would be.

Xia Shixiang, vice manager of Sinopec Sales Corporation, volunteered an answer to the question. Current sulfur content per ton of gasoline and diesel oil is respectively 150ppm and 350ppm. In order to meet Euro IV fuel standards, the oil refining industry will have to invest about 4.3 billion yuan (US$600 million) in raw and secondary materials, and refinery equipment and technology, adding around 320 yuan/ton (US$45) to the cost of gasoline and around 500 yuan/ton (US$70) to the cost of diesel. In addition, sales and marketing companies will have to improve storage and transportation facilities, adding a further cost of 40 yuan (US$6) per ton.

But according to an analysis from Guotai Junan Securities Co., Ltd., the Beijing price adjustment will not only compensate for the extra costs of producing, storing and transporting Euro IV standard fuel, it will also add to the profits of the oil companies themselves. Their estimate is that the additional profit generated will amount to some 10 billion yuan (US$1.4 billion) per annum.

Prior to the National Day holiday in the first week of October, Beijing announced a series of post-Olympic vehicle restrictions aimed at reducing traffic and pollution.

Mao Yufeng, an analyst in Guolian Securities, suggested to China Youth Daily that the government may be intending to influence consumer vehicle purchasing behavior through the current price lever mechanisms and restrictive measures.

(China.org.cn by Ma Yujia, October 10, 2008)