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China's Oil Prices in Tune with International Markets
The price of China's refined oil recently rose again. The prices of gasoline and diesel oil increased 200 yuan and 180 yuan per ton respectively. This marks the fifth price hike since last November. China's crude oil and refined oil prices have already reached levels comparable to international markets.
After the reforms in 1998, China basically established that changes in oil prices on international markets would be comparable to China's. Petroleum prices are primarily set by the market but not entirely free of the government's control. Gasoline and diesel oil prices are guided by the government. The State Planning Commission bases the retail price of gas on the cost of imported oil after taxes and the cost of domestic distribution. The retail price can float within a range of 5%.
A spokesman with the State Planning Commission emphasizes that the reason why China's refined oil prices have continued to rise is because of the sudden changes on the international markets. The restrictions on oil production by OPEC as well as the increase in demand for oil from growing economies, especially as the Asian economies recover. Oil prices began soaring in April 1999 when crude oil prices on the international market hit the bottom and stayed there. The prices reached its highest this March since the Gulf War. Up to now, the price of crude oil on the international markets have climbed an average of 100% while gasoline and diesel oil prices have risen an average of 62% and 84% respectively.
To keep China's oil prices in line with the increasing price of oil worldwide, last November, this February and May, China adjusted the price of refined oil three times. But, there have still been disparities between domestic and international prices. Thus, China increased the prices of oil twice in June and July. The price of gasoline and diesel oil rose 42% and 37% respectively over the five price hikes. China's crude oil and refined oil prices have already fallen in line with prices on the international markets, only it lags behind the international prices by one month.
To allay fears that domestic oil prices won't ever go back down, a spokesman for the State Planning Commission explained, when international oil prices go up, China's oil prices also go up, if the international oil prices come down, domestic oil prices will also decline. The price hikes are not to be used to cover oil companies' losses. China needs to establish an oil pricing mechanism in tune with international markets because the influence of international petroleum prices on the domestic petroleum industry is growing larger. China's petroleum market can no longer be independent of the international market.
In recent years, the development of China's petroleum industry has lagged behind the development of China's economy. Since 1993, China has been a net importer of oil and the amount it imports increases every year. By 1999, crude oil imports surpassed 40 million tons and accounts for approximately 20% of the volume of domestic crude oil processed.
Experts say that linking oil prices to the international markets will help petroleum companies use both international and domestic markets and resources to guarantee a steady supply of oil. After China joins the WTO, it will eventually eliminate and decrease tariffs on petroleum and refined oil and allow foreign oil companies to enter Chinese markets. This kind of development demands that China's oil prices are in tune with international oil prices so that domestic and foreign companies will be at the same starting line when they begin competing against each other. At the same time, reforms in oil pricing mechanisms will help facilitate the construction of modern oil companies and raise their competitiveness on the international markets.
This expert admits that the price hikes will have a major impact on industries and companies which consume a lot of oil. The government should adopt a series of measures to mitigate the effects, such as giving appropriate subsidies for the weaker agricultural, forestry and fishing industries, adjust the pricing or give subsidies to railway and water shipping and cut the costs of management fees or businesses prices of taxi companies.
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