The National Development and Reform Commission (NDRC) raised the domestic retail price for gasoline by 300 yuan ($48.12) per ton and the domestic diesel price by 290 yuan per ton Monday, even though prices for many international crude products have recently been declining.
This divergence is an indication of how ill-equipped the country's current fuel pricing system is to meet its stated goal of bringing the domestic petroleum market under the sway of global supply and demand pressures.
The government on the Chinese mainland started putting a lid on the prices of refined oil products in the domestic market in the early 1990s in order to dampen inflation by lowering fuel costs for logistics companies and manufacturers. At the same time, to satisfy its growing demand for energy and keep the wheels of its economy running, China has been a net importer of crude oil since 1993.
Against this backdrop, it isn't hard to see how the country's leading oil companies soon found themselves stretched thin as prices for imported crude shot up while end-market prices on the mainland remained artificially low due to government intervention.
To address this situation, in 1998 the NDRC began easing its grip on oil prices and letting the global crude market have more say in the pricing of local fuel.
Under revamped price control mechanisms introduced in May 2009, domestic fuel prices can now be adjusted when spot prices for Brent, Dubai and Cinta crude fluctuate by more than 4 percent over a period of 22 working days. It was with the use of this mechanism that the NDRC gave prices a nudge earlier in the week.
However, this inflexible system is still a liability for domestic oil manufacturers.
After decades of widening their presence in the international crude market, mainland oil giants are purchasing more than just the crude products in the NDRC's basket. Actually, much of the mainland's crude oil is now being purchased on markets in New York, Singapore and Rotterdam. But even though most crude oils, especially those trading in New York, have been sagging since the Spring Festival, their adjustments don't register with the mainland's pricing mechanism.
Meanwhile, the relatively long period of time required to open the NDRC's price adjustment window has also had an adverse effect on prices.
In Taiwan, for instance, a similar pricing system is used, although the adjustment period there is only 10 days. This more flexible system, which is tied to the same international products, has so far this year resulted in four local fuel price reductions in line with international trends. Even if the NDRC doesn't modify its tracking basket, Taiwan's example makes a case that a tighter adjustment window could ease cost burdens for mainland oil giants.
The author is director of the China Center for Energy Economic Research at Xiamen University. bqlin@xmu.edu.cn
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