China's top economic planning body is determined to reform its oil pricing
system in order to make it more flexible, and more 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 delink the price peg between local processed oil
products and oil products in three major markets of Singapore, Rotterdam and New
York.
Instead, the authority is planning to link local processed oil
products to Brent, Dubai and Minas crude.
Eventually domestic oil
products will be priced based on the average price 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 price of
oil products 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 per cent), end consumers often find the final oil price
sluggish and easy to speculate.
"The peg switch from oil products to crude
oil is really a breakthrough in the local oil pricing mechanismThe new pricing
mechanism will be available for public review before December 11," the 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 would turn out to be a more scientific pricing mechanism than the
current one.
"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
said.
The CNPC analyst, who asked not to be named, said the time is right
for the Chinese Government to further reform its oil pricing mechanism to better
reflect global oil supply and demand.
The analyst said this is because
when the price gap between global and domestic crude oil is not too big, local
consumers will find a mechanism backed by international prices more
acceptable.
More importantly, the new pricing mechanism will 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 huge 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 is still lower than the
international level.
To fend off supply fluctuations and inflation, the
government keeps 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 soaring global price.
(For more biz stories, please visit Industry Updates)