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By Niu Li

The price of refined oil has been raised many times in China. It is of vital importance that the country's oil price is pegged to that on the world market and is subjected to market forces. The crafting of the price-hike package facilitates the realignment of relationship between different interests and the market-oriented reform of the oil sector.

But people have expressed concerns and doubts about such price hikes. Some ask why the average Chinese person's salary is not being brought into line with that in developed nations now that the oil price is being linked to that on the world market. Others question the necessity of the hike, given that the petroleum sector makes an annual profit in excess of 100 billion yuan (US$12 billion). Still others are concerned about the monopolistic nature of the oil sector and the taxes levied on fuel oil.

But what most concerns people is that oil prices are being pegged to global prices, but no such link is applied to Chinese people's earnings.

The question is conditioned by two prerequisites the market economy and opening up. Oil prices in a closed economy can be totally isolated from those on the international market. China felt none of the paralyzing impact of the two oil crises in the 1970s because China was not a part of the global economy.

But that situation has now been altered by the fact that the infrastructure of a market economy is being established in China and the strategy of opening up is being pursued. In addition, we are now in an era of accelerated economic globalization. Taking all this into account, we have no other choice but to be part of the world market.

Oil as a commodity flows freely across the world, with its price determined by the international market.

But actual oil prices vary widely from one country to another due to different fuel oil taxes levied in those countries. If the domestic price of refined oil remains lower than the world price over a long period of time, oil imports drop, refined oil production falls and oil supply shortages occur.

In addition, a low oil price does nothing to nurture competitive energy enterprises, let alone contribute to the overall development of China's energy sector. All this could lead to a situation where China's oil supply is at the mercy of multinational oil companies and the nation's energy security is threatened.

Labour, by contrast, is unable to flow freely across the world, owing to political, economic, social and cultural factors in different countries. In addition, a huge gap exists between the incomes of workers in different countries because of different levels of economic development, as well as other factors related to their education, skills and productivity. Moreover, workers' incomes can sometimes vary sharply in different parts of the same country. And we must also take into account actual purchasing power when comparing income levels in different countries.

Now comes the question of the oil sector's fat profits.

Petrol corporations have indeed been reaping fabulous profits as a result of massive hikes in oil prices on the world market.

The crux of the question lies in the fact that relationships concerning oil price have yet to be sorted out. This is because oil prices have not been subjected to market forces in China for a long time. Since reform and opening up were launched in the late 1970s, gradual reforms have taken place in the oil sector. Therefore, it will take time for all of the reform measures to have an impact.

At the same time, it should be remembered that oil corporations have not always enjoyed such fat profits. For example, world oil prices remained extremely low during the decade starting from the late 1980s and oil companies, including Chinese ones, found themselves in a difficult situation.

It should also be noted that major global players such as Exxon Mobil, BP and Shell have much larger profits and far higher rates of return than their Chinese counterparts.

In addition, a significant share of the profits is ploughed back into prospecting, extraction and refining. Besides, raising Chinese oil players' competitiveness has become an imperative in the face of accelerated pace of economic globalization. This also requires investment.

As for the question of monopoly, the oil industry involves high capital input, high risks and high returns. Global experiences show that a few major players start to monopolize the oil sector after surviving round after round of cut-throat competition. Although the State Council issued a circular in February encouraging the development of private oil businesses in China, it will take time for all of the articles in this document to be carried out.

The domestic industry's three major players China National Petroleum Corporation, Sinopec and China National Offshore Oil Corporation actually control the upstream resources. The threshold remains very high for newcomers to access the oil market or enter the sector. At the same time, the sector is lagging behind in terms of institutional reform. All this combines to make it very difficult for private businesses to enter the oil sector. Those who already have a foothold in the downstream oil industry are finding the going especially tough.

Given all of the problems, the introduction of a rational mechanism to set oil prices and the acceleration of institutional reform in the sector should be regarded as urgent tasks.

In a pure market-economy scenario, taxes imposed on fuel oil are undoubtedly the most effective way to promote the saving of energy.

In China, however, it will be hard to draw up a policy on a fuel oil tax levy owing to tangled relationships between various government departments and different sectors.

In view of this, the high oil price is no reason the formulation of a fuel-oil tax policy should be delayed.

The purpose of a fuel-oil tax is to encourage the saving of energy, not simply for the sake of levying another tax. The tax rate should be set low in the context of the high oil price, which imposes a heavy burden on ordinary people and industries that rely on this source of energy.

Given the increasingly serious situation with regard to energy demand, no time should be wasted in the formulation of a fuel-oil tax policy.

Road tolls are also closely related to this issue. Although, road tolls play a positive role in the construction, maintenance and operation of highways across the country, road construction is essentially about the provision of a public service. As economic growth means the coffers of the State and some local governments continue to expand, they should gradually be expected to shoulder greater financial responsibilities in this regard. Levying road tolls obviously increases the burden on ordinary consumers and creates an obstacle in terms of sorting out oil-price relationships.

Note: the author is an economist with the Economic Forecasting Department of the State Information Center.

(China Daily June 9, 2006)