Forthcoming Reformation in Oil Price
   
With the impact from various factors, the crude oil price in the
international market has increased drastically since the end of
January, 2006. The oil price in the New York market once reached
more than US$68 per barrel and has been maintained at a high level
of US$65 - 70 per barrel for quite a few days.
   The constant oil price rise in the international market,
however, seems to be still far away from us. The National
Development and Reform Commission made 5 readjustments to the
oil product price in 2005 (mainly in the first half of 2005),
but because of the government control the price of oil products
in China is still around 30% lower than the international price
level.
   How long can Chinese oil consumers enjoy such "favorable
treatment"?
   According to relevant government departments, the framework
for the new oil product pricing scheme has already been fixed.
The reform scheme has been submitted to the State Council and
the National Development and Reform Commission for opinion
solicitation. The revised scheme will be issued at an optimal
time as an interim method.
   As repeated discussions about the new pricing mechanism have
already been held, the main job for relevant departments and
commissions today is to draw up matching schemes.


Pricing basis:
anchor to the international
crude oil price


The greatest difference between the new oil product pricing
scheme and schemes in the past is the change in pricing basis.
The international oil product price will no longer be taken as
the basis. The pricing basis will be shifted to the international
crude oil price.
   The oil product price started to be linked to the
international market in 2000. According to provisions
formulated at that time, the oil product price each month in
China took the weighted average basket price in New York,
Singapore and Rotterdam in the previous month as the pricing
basis. This price plus the oil product circulation fee defined
by the state formed the oil product retail sale bench price fixed
by the National Development and Reform Commission. Only when the
fluctuation rate in the weighted average price in these 3 places
was higher than 8% would the National Development and Reform
Commission re-fix the oil product retail sale bench price in
China.
    The proportion of imported crude oil in China already
exceeded 40% in total consumption in 2005. In the eye of
policy-making departments, taking the average CIF import price
for three types of crude oil as the basis and adding rational
transportation and miscellaneous charges and taxes in China is
a more rational pricing method.
   According to an official from the National Development and
Reform Commission who has taken part in the whole process of the
new scheme formulation, the new scheme is "to convert the average
CIF price of import international crude oil into the oil product
price in China. "
   "China mainly imports crude oil. The previous pricing method
linked to the international oil product market was largely
restricted by human factors, " said that official. "The new
pricing scheme taking the international crude oil price as the
basis can take the production cost in China into better
consideration and is therefore more scientific and objective.
" The greatest defect of the present oil product pricing
mechanism is that it is always lagging behind. In theory, the
oil product price in China is at least one month behind the
international oil product price.
    The original intention of the National Development and
Reform Commission is to exercise macro control on oil price
fluctuations through government intervention. Due to the
"transparency" of the pricing formula, however, the future price
trend can be perceived before the macro control measures taken
by the National Development and Reform Commission.
   Many dealers can therefore conduct "reverse operation". If
the oil price is expected to drop next month, they will sell their
inventory as soon as possible. If the oil price is expected to
increase next month, they will go all out to make purchases and
build up their inventory. In this way not only price fluctuations
are aggravated, the reality of the market demand is also
distorted.
   In the second half of 2005 when the oil supply deficit became
all the more serious, the National Development and Reform
Commission simply stopped oil price readjustments whatever the
international oil price.
   The "calmness" of the domestic oil product price in
appearance can not solve problems in the black. Private oil
enterprises are having a hard time and large oil companies such
as CNPC and Sinopec Group have also started to complain about
the "inversion between the wholesale price and the retail price".
The new reform is aimed at mitigating problems. In the new scheme,
the interval between two price readjustments will be not less
than 10 days. That is to say, once the new scheme starts
implementation, the price readjustment cycle will be shorter by
two thirds in theory.
   Besides, to make a more rational linkage to the international
oil price, the new scheme will adopt a brand-new price
readjustment mode. The retail sale bench price fixed by the
National Development and Reform Commission will be converted
into the price of WTI (West Texas intermediate oil is a
low-sulfur light crude oil traded at New York Exchange. It is
a basic crude oil in the petroleum industry of the United States
and has become one of the important pricing bases for crude oil
in various regions of the world.). When the converted price is
between US$18 - 50 per barrel, the oil product price in China
will have synchronous readjustments to the international oil
price. If the converted price is lower or higher, the oil product
price in China will have non-proportional readjustments.
    It is obvious that once the new scheme starts implementation,
the phenomenon of "what should have a price rise has no price
rise and what should have a price drop has no price dropv will
no longer exist. It also means that a new-round price rise will
be inevitable. An expert says that "judging from the
international oil price today, after the adoption of the new
pricing method the gasoline price will increase by around RMB1
400 per ton and the diesel price will increase by RMB2 000 per
ton."
   Before the implementation of the new scheme, the previous
scheme will have a transition period and the price will have a
gradual increase. Relevant departments are considering how to
provide subsidies to affected sectors such as public
transportation and civil aviation.


System reform:
a step to be taken next


The reform to the oil product pricing mechanism has always been
regarded as an important link in the reform to the oil
circulation system in China. Vice President of the School of
Business Administration, China University of Petroleum, says
that "there would be no price reform without a solution to the
problem of marketization."
    He has proposed his views about the reform to the price
mechanism as follows: (a) graduall