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Perspective on the Increase in China's Oil Prices
This July, the State Planning Commission announced that it would raise the price of oil again. This marks the fifth time this year that the Chinese authorities have raised oil prices. The continuous increases in oil prices will not only affect all aspects of the economy, but it has caused many consumers to ask, "Why is China raising the price of oil so many times in such a short period?"
Oil is a strategic resource crucial to the national economy and people's lives. When the government decides to adjust the price of oil, it sends an important reminder - the price of China's oil is closely linked with the international markets.
China's continuous increase in the price of oil is the product of the large rises in the international prices of crude oil. In 1998, after proposals were made to reform the pricing mechanisms of oil, the price of oil on the international market suddenly changed. Since April 1999, the average price of oil on the international market has shot up 130%, gasoline and diesel oil prices have risen 62% and 84% respectively, due to restrictions on oil production by OPEC and an increase in demand for oil by world economies. Currently, the prices of oil on the international markets have not come down and will remain above US$25 per barrel in the next couple of months.
Although the price of China's oil has also increased, its price is relatively low compared with the US and European countries. The main reason for this is the low tax on oil, currently less than 20%. In the US, the tax on oil is 30%, 50% in Japan and as high as 75% in some European countries. China's oil prices still have a lot more room to increase.
The increase in oil prices affects China's industries, agriculture, transportation and shipping, causing the cost of companies to increase.
The shipping industry has been hit hardest by the increase in oil prices. The railroad industry, which just pulled itself out of debt, has been forced to raise the cost of shipping petroleum to cover its losses. The cost of shipping in the Xinjiang area alone has increased 500 million yuan.
The rise in oil prices has also negatively affected the public transportation and taxi industries. Some cities have begun raising the fare of taxis, pushing the increase in oil prices on to consumers.
The supply of diesel oil has tightened. This phenomenon is very evident in the South. Stockpiles have fallen, attracting the attention of people. In the North, due to relatively cold weather last winter and this spring, the supply of low-grade diesel oil has tightened. Some businesses have already stopped the wholesale of oil.
Some oil retailers have begun to hoard their supply of oil. According to gas stations in Beijing, diesel oil wholesalers are not selling oil according to the price regulated by the state. Some oil retailers have stopped wholesale of oil altogether and are waiting for prices to go up before they sell.
Experts stress that the increases in oil prices do not ease the burden on petrochemical companies. In fact, petrochemical companies are hit the hardest when the price of oil goes up.
On the surface, oil excavation companies have the most to reap, but the rewards aren't from the increase in oil prices. Currently, China's median oil prices are controlled by the state, the companies themselves cannot set the prices. Thus, the profits of oil refineries drop. Also, companies that import chemical engineering raw materials and chemical engineering products from overseas take a beating.
In the long range perspective, after China joins the WTO, tariffs on various kinds of refined oil and fuel will drop around 6% within one to two years. Tariffs on plastics will also drop. Non-tariff measures on crude oil and refined oil imports will gradually be eliminated. Retail sales of refined oil will gradually be opened. After China's oil market is opened up, the two major petroleum companies' refineries will still suffer losses mainly because of the gap in technology and management between China's oil processing industries and foreign oil processing industries.
The oil crisis of the seventies impelled Japan and other countries to develop energy efficient cars. China must also do the same.
Experts point out that the economic benefits the increase in oil prices brings to the petrochemical industry is only temporary. The international oil prices will inevitably drop. China's petroleum companies must take this opportunity while oil prices are high to take the initiative to increase investments in upgrading their technology. At the same time, it must introduce modern management techniques to raise its competitiveness.
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